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The Costs and Benefits of Ethanol
 

The Costs and Benefits of Ethanol

Here’s a back-of-the-envelope calculation on how much the mandate to require ethanol in motor fuel costs consumers, and benefits farmers.

This article notes that in 2000 about 5% of the corn crop went to the production of ethanol, and by 2013, 40% of the corn crop was devoted to ethanol production. The increased demand for corn resulted in a doubling of the per bushel price of corn.

The U.S. Department of Agriculture says in 2011 the total value of the corn crop was $63.9 billion, and that there were 400,000 corn farms in the United States. Because the price of corn has doubled due to the mandate, half of that revenue, or $31.95 billion, is a transfer from consumers to corn farmers in the form of higher prices.

Dividing that $31.95 billion cost among 319 million Americans, the cost to each American from the ethanol mandate is just about $100 a year. That includes not only the price of ethanol, but the higher price of corn in all its other uses.

That $31.95 billion is shared among the 400,000 corn farmers, so the average benefit to each farmer is $79,875.

This is a good example of how legislation providing concentrated benefits to an interest group and imposing disbursed costs on everybody can maintain political support. There is much less incentive to for individuals to mount political opposition against a program that costs them $100 a year than there is for individuals to support a program that nets them $79,875 a year.

Randall G. Holcombe is a Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America (edited with Benjamin Powell); and Writing Off Ideas.
Posts by Randall G. Holcombe | Full Biography and Publications
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