From John Whitehead's blog:
From the inbox:
Dr. Soren T. Anderson of the University of Michigan will be presenting a paper entitled "The Demand for Ethanol as a Gasoline Substitute" at the [Triangle Resource and Environmental Economics] workshop today (Thursday, February 28).
The abstract indicates that ethanol standards are a bad idea:
This paper considers the role of household preferences in evaluating policies designed to promote ethanol as a substitute for gasoline. I develop a model of household production with inputs of a polluting good and a clean good that are perfect substitutes from the household’s perspective. The key parameter in this model is the relative price at which the household is indifferent between the two inputs. I aggregate households and then use the model to formalize the link between the distribution of household preferences for the clean good and the response of aggregate demand to price changes. I estimate the model using data for ethanol sales volumes at a large number of retail gasoline stations during 1997–2006. I find that demand for ethanol is sensitive to relative prices, with elasticities that range from 2.5–3.0 in magnitude. I use the distribution of preferences implied by my estimates to simulate the effects of a national minimum ethanol content standard for gasoline. I find that the efficiency cost of a 25% standard is about $50 billion annually. Costs are half as large as when I naively assume that households have identical preferences based on ethanol’s fuel economy performance relative to gasoline, as is done in previous studies. Costs are lower because households with particularly strong preferences for ethanol are induced to purchase the fuel with less severe distortion of market prices. The policy remains quite expensive, however, with implied costs per gallon of gasoline saved or ton of carbon emissions avoided exceeding most conventional estimates of marginal external damages.
Mr. Anderson is a PhD candidate at the U. of Mich. Here is his paper.