Ethanol Subsidies: Corny Economics?

When manufacturers fail to produce goods that society finds itself in need of, it is called a market failure. There are public goods—such as security, caring for the mentally ill, and green energy—that sometimes fail to provide adequate profits to incentivize providers to generate products that will satisfy the public need. In such situations, politicians can step in and direct state resources to address these shortcomings. The ends are accomplished through diverting tax proceeds toward remedying the matter.

The present case study explores the trade-offs involved with one such market, corn-derived ethanol. There are tensions between the logic of economics and politics in their respective approaches to determining just how much of the product is needed. Consumers are asking whether the subsidies paid for by taxpayers and allocated by politicians are producing net benefits or whether the drawbacks negate the stated goals of supporting the ethanol industry: independence from foreign oil, reducing harms to the environment, and generating economic activity.