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Friday, January 12, 2007

Microeconomics Quiz of the Week

From the WSJ's professorjournal.com:
The U.S. federal government policy of subsidizing ethanol production has been justified on two grounds: energy independence and the environmental benefits of biofuels. U.S. policy, however, results in the high-cost of biofuels produced in the U.S. While U.S. oil companies could use lower-cost sugar-based biofuel (which is produced outside of the U.S.), the high tariffs on these fuels prevents the oil companies from doing so. Instead, the U.S. turns to corn- and soybean-based fuels. The difficulty with these crops is that they are not good inputs for the production of biofuels. Sugar cane produces as much as 10 times the energy required to produce it, while corn-based ethanol makes only 1.3 times its cost of production. The U.S. trade and agricultural policies combined with the federal government's requirement that bioethanol make up 10% of gasoline has resulted in the higher prices of corn and soybeans.

QUESTIONS:

1.) Why does the federal government require oil refiners to mix ethanol into gasoline? Discuss the negative externalities of gasoline consumption.

2.) Why has the federal government placed a tariff on the importation of sugar cane-based biofuel? Which U.S. group benefits from the U.S. biofuel regulation and the tariffs on sugar cane products? Which U.S. groups are harmed?

3.) Should the federal government have placed a tariff on the importation of sugar cane-based biofuel? What is the effect of these tariffs on the price of the ethanol-gasoline mixture?

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