Policy Analysis in Welfare and Policy Spaces: Applications to the Labyrinthine U.S. Ethanol Policy Literature

We discuss the analysis of policy in three “spaces”: the customary (q, p) space, “policy space,” and “welfare space.” Specific advantages of conducting policy analysis in welfare and policy spaces are as follows: (1) it makes clearer the distributional consequences of policy change instead of focusing solely on the aggregate welfare consequences of policy change; (2) it facilitates covering a very wide array of available policy options, instead of examining just a few; (3) it is a powerful tool for analyzing the effects of simultaneous use of multiple policy instruments; and (4) it clarifies what it means for policies to be more/less “efficient,” and for policy instruments to make each other more/less “efficient.” We demonstrate the usefulness of our framework in comparing and critiquing various conclusions recently expressed in the U.S. ethanol policy literature.