Rajagopal, Deepak, and David Zilberman. (2011) Environmental, Economic and Policy Aspects of Biofuels. Hanover, MA: now. Print.
The economic argument behind using of subsidies in the economy is probably to balance the interest draw by individual players in the market to a fair ground for all. The U.S. government use subsidies to reduce on the weight of production for the producers of products. This is done through tax subsidies or the government participating in production process to prevent consumer exploitation of producers. This has been the cause of disagreement in a tough argumentative debate as to whether it is appropriate for the government to abandon the subsidies given specifically to the ethanol production or retain it. Subsidies in ethanol production is productive relevant and important and therefore its removal would bring more harm to the economy and damage social benefit. This memo makes a re-affirmation of need of subsidies in ethanol production in U.S. it is therefore necessary to recommend that subsidies be retained in ethanol production for a number of reasons as shown in the welfare graph below.
Price Demand Old supply
Price sellers see subsidy/welfare benefit
Old price b a subsidized supply
Price buyers see c
d
0 old quantity New quantity Quantity
The ethanol industry in US receives production support from the state that cuts down their cost of production. Subsidizing ethanol production is of great boost to socio-economic development.
Pros of the recommendation
- Subsidizing ethanol production has given a relatively low affordable gas and fuel that boost social benefits in consumption.
- The government formed a supportive renewable fuel standard that required all fuel producers within U.S. to blend into gasoline at least a given fixed amount of renewable gas into it. This gave an ideal platform of using ethanol as a blend to gasoline hence promoting more production of ethanol.
- Subsidizing ethanol guards fuel markets by creating economic restrictions from importing of fuel from foreign countries such as Brazil into U.S. by giving a competitive advantage to locally produced ethanol due low prices.
- There is experienced increased corn production that is used in ethanol production through expansion of agriculture and subsequent increase in employment.
- Ethanol subsidies have also promoted increased environment safety because of increased ethanol production that utilizes the recycling of waste products.
Peterson, E W. F.(2009). A Billion Dollars a Day: The Economics and Politics of Agricultural Subsidies. Malden, MA: Wiley-Blackwell. Print.
Social benefit is also risen reduced environmental effect. The rise in socio-economic development can be shown by an explanatory growth in the U.S. market situation. This a clear evidence for the importance of maintenance of subsidies to ethanol production in U.S. This shown in the market situation trend given below for period 2007 to 2010.
The U.S. market situation (2007)
Welfare changes caused by ethanol production
Graphical representation of derived growth
However, retaining subsidies to producers of ethanol has negative effects in the fuel market. The recommendation that the subsidies be retained is still upheld, this is because the disadvantages of retaining subsidies is less in effect as compared to the economic importance of subsidies participation in the fuel market. These disadvantages are;
Cons of the recommendation
- Increase in subsidies to ethanol production would imply increased utilization of revenue through giving of production support. This can lead to deficit as a result of increased government public expenditure.
- Subsidies in form of tax subsidies lead to loss in government revenue that would have otherwise been used in other economic developments.
- Subsidizing ethanol production makes ethanol enjoy economic favors over other products in the fuel industry. Hence, inhibiting other fuels in the market.
Works cited
Rajagopal, Deepak, and David Zilberman. (2011) Environmental, Economic and Policy Aspects of Biofuels. Hanover, MA: now. Print.
Peterson, E W. F.(2009). A Billion Dollars a Day: The Economics and Politics of Agricultural Subsidies. Malden, MA: Wiley-Blackwell. Print.
Appendixes
Calculation
Considering a production model given by,
Production function; Q = 258K-0.1L0.9
Showing the production function as a function of capital K and labor L
(∂Q/∂K) / (∂Q/∂L) = r/w
We then differentiate with respect to K and L and the solve for the factor inputs as below
(∂Q/∂K) = 0.9(258)K-0.1L0.1, (∂Q/∂L) = 0.1(258)K0.9L-0.9
This would mean that, {0.9(258)K-0.1L0.1}/{0.1(258)K0.9L-0.9} = 375/ 28,000
(0.9/0.1)K-1K = 375/28,000, L/K = 375/28,000(1/9)
L/K = 1/672, therefore, L = 1 unit and K = 672 units.
This describes the production of the ERS. For the company to produce 1 unit of bushel, it will require 1 unit of labor at a cost of $375 and 672 units of capital at costing of &28,000 each.
This calculation applies to a production sector to which inclusion of subsidies in very necessary. Agricultural and food production markets host subsidies as unnecessary condition in the market, not just a sufficient condition. In this case the subsidies given by governments in production of food such as in corn above provides a float foam through the state can regulate the market and bring it back to normality if overstretched. Food is a normal good, and therefore inclusive market forces cannot enable the market stability at all time, it would hence require a referee in the market. The only way to tabulate the market would be the inclusion of subsidies to override overexploitation by producers in the market.
