The U.S. Ethanol and Commodity Policy Labyrinth: Looking into Welfare Space to Analyze Policies that Combine Multiple Instruments

We analyze complicated ethanol/commodity policies not just in (q, p) space, but also in “policy space” and “welfare space.” Specific advantages of conducting policy analysis in welfare and policy spaces are (1) it makes clearer the distributional consequences of policy change instead of focusing solely on the aggregate welfare consequences of policy change; (2) it can be used to analyze the effects of many (even infinitely many) policies instead of just a few; and (3) it makes clearer what it means for policies to be more/less “efficient,” and for policy instruments to make each other more/less “efficient.” We show the usefulness of our framework to critique various conclusions that have recently been expressed in the literature on ethanol policies that employ multiple instruments.