Skip to content
Feb 12 / Jonathan

Ethanol subsidies

James Hamilton wonders over at Econbrowser why corn-based ethanol is so popular with consumers.

The NAS study claimed that even if 100% of the U.S. corn crop were devoted to ethanol production (leaving zero for exports, corn flakes, or whatever), it would only displace 12% of our gasoline consumption; (thanks again to Jerry Taylor for steering me to that estimate).

Although powering our cars with corn is vastly more expensive than other alternatives, this choice seems to be tremendously popular with most Americans. If an economist were asked to justify this attitude, the argument would have to be that the market cost of imported oil vastly understates its true cost to us in terms of geopolitical implications of U.S. dependence on foreign oil. But if that is the underlying rationale, the preferred economic solution would not be a subsidy to corn producers, but rather a tax on oil imports.

The subsidies and economic inefficiencies they create result in taxpayers and consumers paying more than they would under a simple, direct import tariff. A tariff would also produce strong incentives not just for ethanol production but also a variety of alternative energy sources and conservation, with the big advantage that market forces would guide us to the most efficient options on the table. But I guess the ethanol subsidies have the advantage that Americans can pretend that somebody else is footing this bill.

Leave a Comment