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The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies

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  • Harry de Gorter
  • David R. Just

Abstract

A framework is developed to analyze the effects of a biofuel consumer tax exemption and the interaction effects with a price contingent farm subsidy. Ethanol prices rise above the gasoline price by the amount of the tax credit. Corn farmers gain directly while gasoline consumers only gain from any reduction in world oil prices due to the extra ethanol production. Domestic oil producers lose. Historically, the intercept of the ethanol supply curve is above the gasoline price. Hence, part of the tax credit is redundant and represents “rectangular” deadweight costs that dwarf triangular deadweight cost measures of traditional farm subsidies. Copyright 2007, Oxford University Press.

Suggested Citation

  • Harry de Gorter & David R. Just, 2007. "The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(2), pages 477-488.
    • Handle: RePEc:oup:ajagec:v:91:y:2007:i:2:p:477-488
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2008.01190.x
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    Cited by:

    1. Drabik, Dusan & de Gorter, Harry & Just, David R., 2010. "The Implications of Alternative Biofuel Policies on Carbon Leakage," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 102689, Agricultural and Applied Economics Association.
    2. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
    3. Miranowski, John A. & Rosburg, Alicia, 2010. "Using Cellulosic Ethanol to ‘Go Green’: What Price for Carbon?," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61395, Agricultural and Applied Economics Association.
    4. Ye, Fanglin & Lu, Liang & Du, Xiaoxue, 2012. "A Theory of Dynamic Biofuel Tax Credit," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 123750, Agricultural and Applied Economics Association.
    5. Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers 126615, Cornell University, Department of Applied Economics and Management.
    6. Aguilar, Francisco X. & Thompson, Wyatt, 2010. "Charging into the Blend Wall: Conjoint Analysis of Consumer Willingness to Pay for Ethanol Blend Fuels," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61772, Agricultural and Applied Economics Association.
    7. Karel Janda & Ladislav Kristoufek & David Zilberman, 2011. "Modeling the Environmental and Socio-Economic Impacts of Biofuels," Working Papers IES 2011/33, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2011.
    8. Jingbo Cui & Harvey Lapan & GianCarlo Moschini & Joseph Cooper, 2011. "Welfare Impacts of Alternative Biofuel and Energy Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(5), pages 1235-1256.
    9. Virginie Doumax, 2010. "The French Biodiesel Production: An Assessment of the Impacts and Interaction Effects of Policy Instruments," CAE Working Papers 87, Aix-Marseille Université, CERGAM.
    10. de Gorter, Harry & Drabik, Dusan & Just, David R., 2010. "On the EU–U.S. Biodiesel ‘Splash & Dash' Controversy: Causes, Consequences and Policy Recommendations," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61425, Agricultural and Applied Economics Association.
    11. Moschini, GianCarlo & Cui, Jingbo & Lapan, Harvey E., 2012. "Economics of Biofuels: An Overview of Policies, Impacts and Prospects," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 1(3), pages 1-28, December.
    12. Gohin, Alexandre & Treguer, David, 2010. "On the (De)Stabilization Effects of Biofuels: Relative Contributions of Policy Instruments and Market Forces," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(1), pages 1-15.
    13. Thompson, Wyatt & Meyer, Seth D. & Westhoff, Patrick C., 2010. "Us Biofuel And Climate Policies Duel Over Cellulosic Biomass," 2010: Climate Change in World Agriculture: Mitigation, Adaptation, Trade and Food Security, June 2010, Stuttgart-Hohenheim, Germany 91404, International Agricultural Trade Research Consortium.
    14. Chantret, Francois & Gohin, Alexandre, 2009. "The Long-Run Impact of Energy Prices on World Agricultural Markets: The Role of Macro-Economic Linkages," 2009 Conference, August 16-22, 2009, Beijing, China 51560, International Association of Agricultural Economists.
    15. Schmit, T.M. & J., Luo & Conrad, J.M., 2011. "Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables," Energy Economics, Elsevier, vol. 33(6), pages 1194-1205.
    16. Janda, Karel & Kristoufek, Ladislav & Zilberman, David, "undated". "Biofuels: review of policies and impacts," CUDARE Working Papers 120415, University of California, Berkeley, Department of Agricultural and Resource Economics.
    17. Ciaian, Pavel & Kancs, d'Artis, 2011. "Food, energy and environment: Is bioenergy the missing link?," Food Policy, Elsevier, vol. 36(5), pages 571-580, October.
    18. Doumax, Virginie, 2010. "The French Biodiesel Production: An Assessment of the Impacts and Interaction Effects of Policy Instruments," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61698, Agricultural and Applied Economics Association.
    19. Ciaian, Pavel & Kancs, d'Artis, 2011. "Interdependencies in the energy-bioenergy-food price systems: A cointegration analysis," Resource and Energy Economics, Elsevier, vol. 33(1), pages 326-348, January.
    20. Mindy L. Baker, 2008. "Welfare Changes from the U.S. Ethanol Tax Credit: The Role of Uncertainty and Interlinked Commodity Markets," Center for Agricultural and Rural Development (CARD) Publications 08-wp483, Center for Agricultural and Rural Development (CARD) at Iowa State University.

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