(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
0

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.