Corn Ethanol Economics

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I’m really baffled by this report by an economist at Purdue. It starts at the second sentence:

The industry now must get past an imposing wall of federal regulations and market conditions if it hopes to grow

Yes, there is a typical arbitrary maximum limit on the amount of ethanol that can be added to gas (10%). Also, there are arbitrary minimums that can be imposed by the EPA, and those, necessarily, will but up against Congress’ maximum. Those are the federal regulations, but the real issue is “market conditions.” That is, there are very few cars made, let alone bought and sold, that can handle more than 10% ethanol. That is, there is virtually no market for more than 10% ethanol.

To me, this is a clear case showing that the state, try as it might, can not change the laws of economics. Demanding that such-and-such a target is met may work in the short term to advance a particular technology or agenda (of course, at the cost of the unseen losers). But this can never work long term: Congress and the EPA can not change the fact that it is uneconomical to build and sell cars that work with more than 10% ethanol.

But, to this economist at Purdue, this is a problem that needs to be solved, because, if it’s not, the price of corn will not continue to rise. Has he not noticed that in the past few years of high gas and corn prices that the increased cost of most grains caused very serious problems: not just the higher cost of beer, but famine in developing countries? High corn prices are not a good thing – they benefit the few while harming the many.

8:13 am on December 23, 2008
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