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

Posted: 27 Apr 2009

See all articles by Harry de Gorter

Harry de Gorter

Cornell University - School of Applied Economics and Management

David R. Just

Cornell University - Dyson School of Applied Economics and Management

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.

Suggested Citation

de Gorter, Harry and Just, David R., The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies. American Journal of Agricultural Economics, Vol. 91, No. 2, pp. 477-488, May 2009. Available at SSRN: https://ssrn.com/abstract=1375795 or http://dx.doi.org/10.1111/j.1467-8276.2008.01190.x

Harry De Gorter (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States
607-255-8076 (Phone)

David R. Just

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States
607-255-2086 (Phone)
607-255-9984 (Fax)

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