The economic effect of governmental incentives on the ethanol fuel market

Abstract

Rising gasoline prices and increased awareness of air quality problems, as well as heightened concern for homeland security have compelled Americans to reevaluate their views on alternative fuels. As an alternative fuel, ethanol is one of the more widely adopted fuels in the market today. Corn-based ethanol fuel may be domestically produced and is subsidized by the state and federal governments; however, there is currently limited research on the market for ethanol. For this study the market supply and demand for U.S. corn-based ethanol is estimated. The result from this estimation provides insights on the impacts current ethanol subsidy legislation has on the ethanol market. This analysis reveals that ethanol and methyl tertiary-butyl ether (MTBE) are close substitutes and that the federal subsidy for ethanol producers may no longer be warranted.