Welfare Analysis of the U.S. Ethanol Subsidy, A

Xiaodong Du, Dermot J. Hayes, Mindy L. Baker
November 2008  [08-WP 480] (Revised)

Based on a transparent analytical model of multiple markets including corn, ethanol, gasoline, and transportation fuel, this study estimates the welfare changes for consumers and producers resulting from ethanol production and related support polices in 2007. The welfare estimation takes into account the second-best gain from eliminating loan deficiency payments. The results suggest the total social cost is about $0.78 billion for given market parameters. We validate the model's underlying assumption and test for the results' sensitivity to assumed parameters.

Keywords: consumer surplus, deadweight loss, ethanol, subsidy, substitution.

JEL classification: D6, Q18, Q21.

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