(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 624

CHAPTER 16 • General Equilibrium and Economic Efficiency 599 include a minimum amount of renewable fuel each year—a stipulation which essentially mandated a baseline level of ethanol production The U.S and Brazilian ethanol markets are closely tied to each other As a consequence, the U.S regulation of its own ethanol market can significantly affect Brazil’s market This global interdependence was made evident by the Energy Security Act of 1979, by which the U.S offered a tax credit of $0.51 per gallon of ethanol to spur alternatives to gasoline Moreover, to prevent foreign ethanol producers from reaping the benefits of this tax credit, the U.S government imposed a $0.54 per gallon tax on imported ethanol The policy has been highly effective: The U.S has devoted more and more of its corn (a) 2500 Million gallons harvest to ethanol production, while Brazilian imports (which are made from sugar cane) have declined While this policy has benefited corn producers, it is not in the interests of U.S ethanol consumers It is estimated that whereas Brazil can export ethanol for less than $0.90 per gallon, it costs $1.10 to produce a gallon of ethanol from Iowa corn Thus American consumers would benefit if the tax and subsidy were removed—a move that would increase the imports of the cheaper sugar cane-based ethanol from Brazil Figure 16.2 shows the predicted changes in the ethanol market if U.S tariffs were completely removed in 2006 The top green line in Figure 16.2 (a) estimates Brazil’s ethanol exports without U.S tariffs in place, and the blue line represents Brazil’s Brazil Exports without Tariff 2000 1500 1000 Brazil Exports with Tariff 500 05 06 07 08 09 (b) 10 Year 11 12 13 14 15 14 15 U.S Ethanol Price with Tariff Dollars per gallon 2.1 2.0 1.9 1.8 U.S Ethanol Price without Tariff 1.7 1.6 1.5 05 06 07 08 09 10 Year 11 12 13 F IGURE 16.2 REMOVING THE ETHANOL TARIFF ON BRAZILIAN EXPORTS If U.S tariffs on ethanol produced abroad were to be removed, Brazil would export much more ethanol to the United States, displacing much of the more expensive corn-based ethanol produced domestically As a result, the price of ethanol in the U.S would fall, benefiting U.S consumers