Reference no: EM131737783

Question: In an attempt to help the farm sector, Congress has several times passed legislation initiating and then extending the requirement that ethanol be blended with gasoline sold at the pump in many states. Because the cost of producing ethanol is higher than the cost of producing gasoline, the Federal government pays a subsidy to ethanol producers. The evidence is fairly clear that the demand for ethanol boosts the price of corn. Farmers argue that they would receive a minimum price anyhow, so food costs to consumers do not rise, and the greater dependence on ethanol reduces the demand for foreign oil, hence reducing imported oil prices and the amount of money going to OPEC nations. Assuming this argument has some merit, how would you measure whether the taxpayers are essentially getting their money's worth out of the ethanol subsidy? In your answer, indicate whether that policy might have any long-term impact on productivity growth.