Volume 2

• Welcome
• President's Message
• Abstracts
• Essays
  • Preface
  • Essay 2
  • Essay 3
  • Essay 4
  • Essay 5
  • Essay 6
  • Essay 7
  • Essay 8
  • Essay 9
• About the Authors
• Past Conversations
• Contact Information

Legal and Economic Relationships Between Neighbors.

James Frew, Faculty

Life in a modern democracy goes far beyond traditional local ties to family and local community. It entails living with prices of everyday necessities that are partially determined by supply and demand factors around the world. Moreover, our government policies often affect foreign countries at least as much as U.S. citizens. This web of global connections means that we now have an interdependency with some people who live in radically different circumstances than the average American. In Whose Keeper? Alan Wolfe writes:

... the less we live in tightly bound communities organized by strong social ties, the greater is our need to recognize our dependence on others .... [A]s a result, people are more confused about how to balance obligations to those they love with obligations to strangers and distant others. Being modern will always require some way of linking both intimate and distant obligations. (Wolfe 20)

He continues:

There is an obvious need, with the modern condition so complicated, to believe that invisible hands, self-interested behaviors, and unanticipated consequences will do for society as a whole what they once seemed to do for markets, that is, coordinate diverse behaviors into a harmonious whole ... [However] ... people do not satisfy their responsibilities to one another by thinking only of their responsibility to themselves. (Wolfe 49, 50)

This essay will consider the social interaction between "neighbors" through both legal institutions and economic markets. We will consider neighbors to be any individuals who are affected by each other's behavior, even if they live in distant geographic locations. In the process of making this consideration, this author will include more extensive quotations than is customary, in order to emphasize that a number of other authors have written about the series of issues that must be addressed.

As we examine these relationships, we must be aware of the fact that economic markets are driven primarily by economic self-interest, rather than by any concern for how the impact of economic choice affects others. Henry Tam describes what has occurred with only market incentives:

Under the new world order of market individualism, social and political power is concentrated even more in those in command of material wealth. Those lacking the skills or motivation to secure increasing economic resources are marginalized, and their needs are viewed as being parasitic on the welfare support made available by the economically powerful. (Tam 1)

To facilitate better relationships between neighbors, a political process must be found that will replace the free market in deciding how resources should be allocated. Thus:

To create a society as modern as the individuals who compose it, we must look beyond rules that emphasize self-interest to rules that enable people to take account of who they are and who they want to be.... The distinctive contribution of a sociological approach to morality, in other words, is ... to help individuals discover and apply themselves the moral rules they already, as social beings, possess. (Wolfe 5, 12)

This moral approach involves a co-operative process, as expressed by the authors of Civic Declaration:

.... isolated individuals may slip into thinking more and more that they should look only to their own interests, with little regard being paid to the implications for others. Through being involved in co-operative ventures, however, they can learn to appreciate having a unity of purpose with others, and experience participating as equals in determining how decisions should be made. (Boyte 2)

Moreover, the sense of collective responsibility must resonate on a personal level.

.... collective responsibility includes obligations of care for the vulnerable and disadvantaged. Furthermore, communitarians need to appreciate the close connection between personal and collective responsibility. Personal responsibility is most likely to flourish when there is genuine opportunity to participate in communal life. (Selznick 62, emphasis in original).

One method of achieving this goal has become known as Communitarianism, which is "based on the three communitarian principles of co-operative enquiry, mutual responsibility, and citizen participation" (Tam vii). Tam explains:

What communitarians advocate is the transformation of prevailing attitudes and conditions in society in order to build inclusive communities which respect all three principles. This means that questions about what collective action is to be taken for the common good are not to be left either to political elites who are rarely answerable to their fellow citizens (perhaps once every four or five years), or to individuals in the marketplace, but are considered through informed community. (Tam 15)

Thus, co-operative inquiry by members of the community promotes a sense of unity and assures application of commonly accepted moral principles to resolve current problems. This does not always guarantee that a more moral solution can be devised than the free market solution, however. The government does not always represent the interests of the general community. Economically powerful special interest groups are also politically powerful, often working through lobbyists in Congress and campaign support for Presidential nominees. Hence, the governmental process does not automatically result in better representation of "unprivileged groups."

Moreover, some social problems are sufficiently complex that the solution to parts of the problem creates unintended negative side effects. To illustrate this point, this essay will apply these communitarian principles to an analysis of two, quite different, U.S. policy areas. First, the process of adjudicating Native American land rights will be considered. This is currently administered within a strict legal framework, but needs reform to insure that justice is better provided for Native American owners. Second, we will examine the "food versus fuel debate" over the continued U.S. governmental subsidies for ethanol production. Ethanol was initially seen as a way to produce greener fuel and promote energy sustainability, but increased production of corn ethanol has contributed to an increased cost of food and drawn international criticism as contributing to world hunger.

The ethanol debate, a market-oriented issue, is considerably more complex than the legal system used to enforce rights to the just use of land. Hence, the latter problem will be discussed first, in the next section.

Native American Land Rights

The U.S. Federal Government is currently attempting to assist native America tribes in developing their lands in order to provide better sources of income. The solution to this problem of Native American income from land involves attempts to reverse problems which have been caused by laws which were originally passed to remove control of land from the Native American tribes. The problem was created when the tribes were moved to reservation lands, which have been governed by a federal trust ever since. To understand this issue, a review of Indian land law is useful. (This review closely follows that of Hans S. Isakson and Shauntreis Sproles, "A Brief History of Native American Land Ownership.")

Native American tribes treated land as a common resource. Hence, they traded personal property, but never land. In contrast, European settlers were accustomed to privately owned land. This was an important difference because Europeans treated land as a commodity. At first, settlers tried to obtain rights to use Indian land through negotiating treaties, which allowed them to share hunting privileges, rather than trading for game taken by the Indians. As settlers became more numerous, however, they begin to engage in violent conflicts where land was taken by force.

The Dawes Act of 1887 legalized the taking of land by settlers, and hence the use of government forces to assist in relocating natives. A land allotment was given to each tribe based on the number of members. When the tribe occupied land area greater than the resulting acreage, they were relocated. It is estimated that this Act reduced the amount of land held by natives from 147 million acres in 1887 to 55 million acres in 1934. (Isakson 70). Moreover, the natives' land was now held in trust for them by the U.S. government. Thus, the government restricted the "right of alienation" from the land, even to sell it to the tribe. This forced Indian descendents to divide the land held by their parents, rather than selling the land and splitting the proceeds. Eventually, land became too fractionalized to make improvements economically viable.

The allotment of Indian lands was ended with the Indian reorganization Act of 1934, which also returned surplus lands to the tribes. The Indian Land Consolidation Act of 1983 makes it possible for tribes to consolidate lands by purchasing fractional shares from members. The right of alienation from the land is still prohibited, however, and the land is still held in trust by the U.S. government, which prohibits the sale of any parcel of land. Thus, the land has a special legal status, so regular laws and precedents typically relied on when mediating land disputes do not apply. Of course, this makes investing in improvements to the land quite risky. As Isakson states: "Indian law has a long way to go before it can be depended upon to enforce the terms of lease and other contracts" (75).

This unfortunate situation could be improved by the establishment of a system to enforce native Americans' rights through resolving claims for damages brought against non-native violators - both individuals and governments. Canada has established a system that could serve as a model for the U.S. In 1982, the Canadian Constitution was modified to confirm Native American rights in claims suits. Then, in 1991, Canada established the Indian Specific Claims Commission (ISCC), which is: "an independent body that [investigates] claims made by Indian bands...that have been rejected by the Government of Canada" (Simons 84). Since this body is funded by the federal government, it provides native tribes (First Nations) an alternative to pursuing costly court cases.

"The settlement of comprehensive and specific land claims can have a positive impact on the lives and economy of the citizens of the First Nations in Canada. Even though a settlement does not mean that the First Nations have obtained fee simple ownership to lands, a clear definition of the rights of the aboriginal claimant group and the non-aboriginal people have brought about a better business environment in these areas. Since mineral and resource rights are clearly outlined under each comprehensive claims settlement, there is hope that investments will improve, especially in the area of mineral exploration." (Simons 94).

This solution requires the provision of additional means, which are established outside the regular court system, in order to provide adjudication of conflicts that are not well served by the rule of law. Instead of applying impersonal laws to general situations, local problems are thus ameliorated by creating additional "quasi-legal" institutions which involve community members in a non-adversarial process.

The "Food Versus Fuel Debate" and Subsidizing Ethanol Production

The second issue to be examined again involves supplementing an existing social institution - in this case market economics - with more specific remedies. In this case, however, the solution requires passing laws which modify free market outcomes. Thus, a flexible mechanism - the price system, which fluctuates every day as markets adjust - is being partially replaced by the more rigid rule of fixed government regulations.

This contrasts with land issues examined above where more flexible, "legal" mechanisms replace more rigid laws. In order to appreciate the significance of this difference, we must examine the economic situation - government subsidies for ethanol fuel production - in its full complexity. (Only then will it become clear how difficult it is to improve the situation with government legal intervention.) In order to do so, economic models will be used to analyze how the market determines the price of ethanol, given the prices of the inputs required to produce ethanol and the prices of alternative fuels. First, however, some background information is needed to provide a motivation for this detailed analysis.

As traditional fossil fuels become scarce, biofuels are being produced to replace them. One such fuel - corn ethanol - consists of grain alcohol that is produced by fermented corn. Since corn is diverted from food and livestock feed markets in order to produce ethanol, the "food versus fuel" debate has begun. A good summary of this debate is provided by Lee, Clark and Devereaux:

According to the Food and Agriculture Organization of the United Nations (FAO), global food prices have increased dramatically, rising by nearly 40% in 2007 and continuing to increase at the time of this session. Nearly all agricultural commodities have been affected, including major grains such as maize, wheat and rice. The causes of the price hikes include adverse weather in key production areas, higher agricultural input prices (especially oil and oil-derived products such as fertilizers), and limited elasticity in agricultural production capability. Demand for food has also grown, especially in Asia and sub-Saharan Africa. While experts differ as to the extend of its role, increased biofuel production has also clearly played a part in higher food prices, shifting land away from food production and triggering increased competition for land use. (Lee 1)

Others have stated this issue somewhat differently but make the same point:

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, said the food crisis posed questions about the survivability of democracy and political regimes [and] noted that political instability had already hit countries as disparate as Haiti, Egypt, the Philippines and Indonesia because of food shortages.... Some ministers from poor countries, for example, are growing impatient with the way the West is addressing global warming by subsidizing and encouraging conversion of corn, sugar cane and other food products into substitutes for oil. The shift is helping to drive up prices, they say. .... Mr. Strauss-Kahn said he had heard from many financial officials this weekend that the West's focus on fuel, at the expense of food, was a "crime against humanity. (Weisman 2008)

.... even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains .... And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states. (Krugman 2008)

We will return to this food versus fuel debate, and the specific policies that affect it after a brief introduction to ethanol fuel and its production.

Introduction to Ethanol Production

Global biofuel production is shown in the figure below for 2006. For ethanol, the global leaders are the United States and Brazil. Brazil and the United States together make up almost three-fourths of the world ethanol production. The United States overtook Brazil as the leading ethanol producer in 2007. (Abbot 41)

Global Biofuels Production, 2006

Figure 1(Source: Abbot 41)

Sugar Cane ethanol from Brazil is less expensive to produce than corn ethanol in the U.S. but importers must pay a tariff, which raises its U.S. price above corn ethanol.

The United States government has promoted the development of ethanol production in order to reduce our dependence on fossil fuels, which are becoming scarce, and develop a "greater fuel," one which creates less air pollution. Last year, the U.S. Environmental Protection Agency (EPA 2007) published a statement shown in the Appendix. The costs of maintaining ethanol subsidies, which we will consider in the next sections, must be considered relative to this list of advantages and disadvantages.

The Economics of Ethanol Production

John Carey, a Senior Correspondent in Business Week's Washington, D.C. bureau  writes:

When corn reaches $6 per bushed, [ethanol] producers can't make money unless they can charge $2.50 per gallon ....With corn futures hitting $7.50 today, the numbers just aren't there.... Analysts downgraded [the stocks of ethanol manufacturing firms] BioFuel, VersaSun Energy and Archer Daniels Midland, among speculation that ethanol plants would be closed or hibernated for the duration of the price crises. (Carey 2008)

To begin to understand these statements, and the role government subsidies play in the ethanol market, it is useful to examine the figure below, which shows the value of corn when used for ethanol vs. its cash value when sold as corn. As can be seen in the graph, the value of corn used for ethanol was higher from 2004 through 2007.

Corn Breakeven Value as Ethanol vs. Gasoline Price and Corn Price

Figure 2 (From: Thomas E. Elam 2008)

If we extend the line to the right side of the graph (where gas price = $2.50) it is clear that the value of corn sold on the market exceeds its value when used for ethanol production. Thus, we are now entering a period when further production of ethanol may not be economically feasible

This continually rising price of corn is predictable, given the increase in the number of ethanol plants in operation, which create a new type of demand for corn (vs. food) and hence bid its price up. Note that the difference between the value of corn used as ethanol and its price in the regular corn market changes as corn price rises. (The graph simplifies this complex situation by using two scales in order to superimpose the measures on the same graph.) This is because of the ratio between the price of the corn input (per bushel) and the value of the ethanol output (per gallon). As more ethanol is produced, the additional supply has reduced its market price, while at the same time increasing the price of the corn used to produce it.

As explained by Westcott of the USDA, expansion in the number of ethanol plants has recently led to sharply increased production:

Production capacity in the industry will exceed 12 billion gallons within a few years. Further expansion in ethanol output during the next decade is expected to be more moderate. Still, even with less than full capacity utilization in the industry, ethanol production grows to more tha12 billion gallons by 2015 in USDA's 2007 long-term projections, well above the renewable fuel standard mandated by the Energy Policy Act. (Westcott 2007)

U.S. Ethanol Capacity Growing Rapidly

Figure 3 (Source: Ethanol plant information, updated April 2007, based on Renewable Fuels Association data).

Corn-based ethanol production projected to exceed renewable fuels mandate

Billions of gallons

Figure 4 (Source: USDA Agricultural Projections to 2016, February 2007)

The projected increase in ethanol production is a source of concern to government planners:

Ethanol production in the U.S. has grown tremendously in the last decade. Production was averaging 1 billion gallons per year in the early 1990s, grew to 4 billion gallons in 2005, and in 2006 exceeded 5 billion gallons. If current plans for new construction and expansion come to fruition, production capacity will exceed 11 billion gallons by the end of 2007. Recent growth has been supported by the combination of favorable public policy and high nominal gasoline prices. Most U.S. ethanol is made from corn. The domestic industry used a record 13% of domestic corn production in 2005 and is estimated to have used over 20% in the 2006/2007 marketing year. (Fortenbery 1)

Baker extends this concern to future levels of production:

With a corn-to-ethanol conversion rate of 2.7 gallons per bushel (a rate that many state-of-the-art facilities are already surpassing), the U.S. ethanol sector will need 4 billion bushels per year by 2011- roughly twice as much as it consumed in 2006. ... The most recent USDA projections suggest that much of the additional corn needed for ethanol production will be diverted from exports and feed ... As long as corn is the primary feedstock for ethanol in the U.S., sustained increases in ethanol production will eventually require major adjustments in the corn market. (Baker 2006)

The United States Department of Agriculture (USDA) currently predicts that this 2008's large corn harvests will still be insufficient to reduce prices.

High crop prices and favorable weather are triggering bigger harvests world wide, but grocery shoppers probably won't see much relief anytime soon.& ... Based on Aug. 1 conditions, U.S. farmers are expected to harvest 12.3 billion bushels of corn, which would be their second-largest crop ever, trailing only last year's 13.1 billion-bushel harvest. But global demand for grain is rising so quickly that even bumper harvests can't puncture the two-year-old grain-price rally that has been inflating retail food prices. ... food executives and livestock producers can expect to pay twice as much for corn in the foreseeable future as they did for much of the previous decade. (Kilman 2008)

The specific components of corn demand are shown in Figure 5: ethanol production has recently consumed most of the increase in U.S. corn production.

Figure 5 (Source: NewsletterAdvisors.com: Business Financial Publishing, Washington DC, 6/2008)

The growing world population would have absorbed the increased corn (and soybeans that it displaced), if it were not being diverted to the production of ethanol. This is especially true, since the rise in production has not kept pace with world population growth. This is also one reason why the debate over food prices has recently intensified.

Figure 6 (Source:NewsletterAdvisors.com: Business Financial Publishing, Washington, DC, 6/2008).

Another reason for the significance of higher corn prices on world hunger is the importance of food purchases in third world countries, where spending for food entails a much higher portion of a typical household’s income than in the U.S. (as shown in the table below). In addition, “[I]n poor countries … grains are a much bigger fraction of food expenditures,” asserts Abbott (39).

Figure 7 (Source: Abbott 39)

Moreover, selling more corn for both food and fuel has resulted in a drastic fall in the stock-to-use ratio, which makes further price inflation highly likely.

As Abbott points out, “at the end of the 2008/09 marketing year world corn stocks-to-use will reach the lowest level since the 1973/74 marketing year, even with normal yields, according to USDA projections made in May 2008 and shown in the figure “(14).

World Corn Stocks-to-Use

Figure 8

This drop has happened despite an increase in the area used to grow corn, at the expense of soybean, another important food grain. Thus, ethanol production has also indirectly raised the price of soy beans:

Since 2002/03, corn harvested area has increased sharply by 14 percent primarily in response to expansion of corn used for ethanol … The large shift of area toward corn, particularly in 2007/08, came heavily at the expense of soybean and oilseed acres. World corn area increased by seven percent in 2007/08 alone and soybean area dropped by four percent, further tightening world oilseed stocks. (Abbott15)

Figure 9

Changing U.S. Government Policies – The Projected Impact on the Price of Corn

Economists McPhail and Babcock comment on the price effects of ethanol production:

[When] 25% of U.S. corn is used to create ethanol, then elimination of ethanol could cause corn prices to drop in half. However, this simple calculation provides little insight into the impact that a change in U.S. ethanol policies have on the price of corn, food, and gasoline because U.S. ethanol plants will not simply disappear with a change in U.S. ethanol policies. Plants will keep operating as long as they make more money operating (or lose less) than they would make by shutting down. (Babcock 2)

In order to properly analyze the effect of ethanol on corn prices, an economic model is required. T. Randall Fortenbery and Hwanil Park, Agricultural Economists at University of Wisconsin-Madison, built such a model and used it to analyze recent changes in corn prices. They conclude,

[The] USDA has reported the average U.S. cash corn price for first quarter 2006/2007 to be $2.54 per bushel. By first quarter 2007/2008 the average price had risen to $3.34, and by December 2007 the average price was $3.88 per bushel. Thus, corn prices increased 32 percent between the first quarter of the 2006/2007 marketing year and the first quarter of the 2007/2008 marketing year, and another 16 percent during December 2007. Since ethanol production capacity essentially doubled between the first two quarters of the last and current marketing years, the model results above suggest that ethanol’s contribution to the price rise was about 41 cents per bushel, ceteris paribus. This would have resulted in an average 2007/2008 first quarter price of $2.95 per bushel had nothing else changed.

They also explain why their model’s prediction falls short of the actual price of corn:

While this is a significant year over year increase, it is substantially less [$.39 per bushel] than the actual price appreciation between the start of 2006/2007 and the start of the 2007/2008 marketing year. As a result, while ethanol production has had a significant and positive impact on corn price, it does not fully explain price level changes in the 2006/2007 marketing year. What else could have happened? One factor contributing to increased prices is likely growth in export demand. (Fortenbery 15).

This export demand was largely from China, and is expected to continue:

The US produced 101 million metric tons more corn in 2007 than required for its 1995 pattern of domestic production, export, and for ethanol. [Thus] US corn production increased dramatically in the 1995-2007 period, but even more spectacular was the rise in grain demand for Chinese meat consumption. In this context, US ethanol production can be seen as an insignificant sideshow event in terms of impact on grain usage. (Lane 1)

Figure 10

Lane (1) explains why this has occurred:

In 1995, the population of China was 1.203 billion, and the Chinese people consumed, according to the FAO, 25 kilograms of meat per person. Overall meat consumption was 30.075 million metric tons. It takes an average of five kilograms of grain to produce one kilogram of meat. Applying grain needs to meat consumption, China would have required 150.4 million metric tones of grain in 1995 to supply livestock for its meat demands.

Higher incomes in 2007, however, resulted in over twice the meat demand per person.

In 2007, the population of China was 1.321 billion, and the Chinese people consumed, according to the World Resources Institute, 53 kilograms of meat per person. Overall meat consumption was 70.013 million metric tones. Applying grain needs to meat consumption, China would have required 350.1 million metric tones of grain in 2007 to supply livestock for its meat demands. This represents an increase of 199 million metric tons, or 7.8 billion bushels. (Lane 2)

Government Ethanol Subsidies

Government policy makers anticipated the increase in corn prices as ethanol production increased, and so they created a subsidy for corn used as ethanol. A subsidy is a form of governmental market supplement. To see how these work, consider the diagram below, which depicts typical supply and demand curves. The quantity supplied increases because more is produced at higher prices (per gallon) and quantity demanded decreases as less is purchased at higher prices. (This diagram has been drawn so that the alternative price outcomes occur at round numbers, for ease of exposition.)

The free market is in equilibrium where the curves cross – where the quantity supplied equals quantity demanded. A $2.00 per gallon subsidy, shown in the diagram by the dotted black line between the supply and the demand curves, raises the price received by producers to $5.00 from the market equilibrium of $4.00. (The subsidy also reduces the price paid by consumers to $3.00.)

Figure 11

In actual practice, rather than a subsidy of $2 per gallon, the amount of the subsidy has varied over time. As explained by Taheripour and Tyner:

Between 1978 and today, the U.S. federal ethanol subsidy has ranged between 40 and 60 cents per gallon. The federal subsidy today is 51 cents per gallon. In addition to the federal blending credit, there are also some other federal and state subsidies… the total subsidy available for ethanol in 2006 to ranges between $1.05 and $1.38 per gallon of ethanol or between $1.42 and $1.87 per gallon of gasoline equivalent. Many would regard these figures as being high, but they do demonstrate that the ethanol industry has been one with substantial subsidies. (Taheripour and Tyner 1).

Modeling the Effect of Removing Ethanol Subsidies

The next step in our analysis of ethanol policy is to estimate the portion of the increase in corn price (that is attributed to ethanol production) due to A) the government blended fuel subsidy and B) the renewable fuel stand (RFS). A team of agricultural economists at Purdue University built an econometric model, and used it to do this (Abbott 2008). Their model also factors in changes in the price of oil. (An Iowa State University study [Babcock 2] also does this, and reaches consistent results. Since the Purdue group’s results are more comprehensive, however, we will refer to them in our discussion.)

Abbott’s model allows oil prices to vary over a range, and also allows elimination of the RFS. The results are illustrated in the following graph. (Note that if the subsidy were eliminated, continuation of the RFS would raise the price of ethanol prices when oil prices are below $120/barrel. This is because enough ethanol would be voluntarily blended with gasoline since it is cheaper to equal the percentage required by the standard.)

Corn Prices Under Difference Policies and a Range of Oil Prices

Figure 12

Abbott, Hunt, and Tyner explain the results shown in Figure12:

Current U.S. policy consists of a fixed subsidy of 51-cents per gallon of ethanol plus a Renewable Fuel Standard (RFS), which imposes a minimum renewable fuel usage requirement each year. An important question is what the relative importance is of these policies and of higher oil price. [The] figure shows the strong link between today’s oil and corn prices under the assumption of no subsidy or RFS, with the 51-cent per gallon fixed subsidy, and with a Renewable Fuel Standard of 15 billion gallons of corn-based ethanol and no subsidy. At $40 oil, the corn price is 32% higher with the subsidy than without. However, at $140 oil, the corn price is only 17% higher with the subsidy, adding $1.07 per bushel to the corn price. (Abbott 44)

They conclude,

Most of the corn price increase is due to the higher oil price—not the subsidy. With no subsidy or mandate, corn moves from $1.71 at $40 oil to $5.26 at $120 oil. With the subsidy, corn moves from $2.26 at $40 oil to $6.33 at $120 oil. Put in round numbers, when crude went from $40 to $120, corn went from $2 to $6, a tripling of both prices. About $1 of the corn price increase was due to the subsidy, and $3 to the higher crude price. As oil has increased, corn-based ethanol is demanded to substitute for gasoline. At high oil prices, this would happen with or without the subsidy. However, the subsidy does increase the price of corn $1.07 over what it would be with no subsidy in place [emphasis added]. A dollar a bushel is important whether corn is $3 or $6. Whether the subsidy should be maintained, removed or changed to a variable subsidy is a question for debate. But removing the subsidy would not return us to corn prices seen over the past decade unless crude oil prices fell as well. (Abbott 44)

This result is discouraging, given the desire to reduce world food prices of corn. However, they also mention an additional alternative:

The U.S. tariff on imported ethanol introduces a potentially greater distortion than does the subsidy or mandate. Since high oil prices directly lead to higher corn prices, corn ethanol becomes much more expensive. Sugarcane-based ethanol is less expensive to produce than corn ethanol at any oil price, but the gap widens at higher oil prices. So removal of the tariff on imported ethanol would lead to the biofuel coming from the lowest cost source–sugarcane–which would reduce some pressure on corn prices and provide the United States with lower cost ethanol. Brazil has the potential to expand ethanol production substantially without increasing world sugar prices substantially, so imports down the road could be quite high. (Abbott 46)

Conclusion

As the forgoing discussion illustrates, the market price system is complex and subject to changes which are sometimes difficult to anticipate. Thus, governmental policies may have good intentions, such as production of greener fuels, but result in unforeseen harms, such as greater hunger in countries on the other side of the world. Moreover, regulations must be flexible enough to change as economic conditions change. Even then, proper analysis of how to change the policy to realign regulations to achieve their intended purpose is sometimes difficult to achieve.

Ideally, government regulation can offset the power of the economically powerful individuals who rule the markets to produce more humanitarian results. In practice, however, this is often difficult to achieve. Moreover, the government itself does not always represent the interests of the general community. Special interest groups can exert political pressures on government decision makers, especially with respect to fuel prices in times when fuel suppliers are earning record profits. (Such pressure may even take subtle form when analysis of the issues is complex.) When this occurs, governmental power may serve those with economic power, rather than serving as the wider community’s counter balance. Thus, economic regulation may be much less effective in “helping neighbors” than other political innovations.

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References

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• Wolfe, Alan. 1989. Whose Keeper? California: University of California Press

Appendix

EPA Statement on the Impacts of The Renewable Fuels Standards

"The Energy Policy Act of 2005 amended the Clean Air Act to establish a Renewable Fuel Standard (RFS) program ... The  [EPA's] Regulatory Impact Analysis (RIA) provides an analysis of the energy, emissions, air quality, and economic impacts of expanding the use of renewable fuels in comparison to a reference case of 4 billion gallons of renewable fuel use which represents 2004 conditions projected out to 2012. Depending on the volume of renewable fuel anticipated to be used in 2012, EPA estimates that this transition to renewable fuels will reduce petroleum consumption between 2.0 and 3.9 billion gallons or roughly 0.8 to 1.6 percent of the petroleum that would otherwise be used by the transportation sector. "

"With regard to emissions impacts, carbon monoxide emissions from gasoline-powered vehicles and equipment will be reduced between 0.9 and 2.5 percent. Emissions of benzene (a mobile source air toxic) will be reduced between 1.8 and 4.0 percent. Further, the use of renewable fuel will reduce carbon dioxide equivalent greenhouse gas emissions between 8.0 and 13.1 million metric tones, about .4 to .6 percent of the anticipated greenhouse gas emissions from the transportation sector in the U.S. in 2012."

"At the same time, other vehicle emissions may increase as a result of greater renewable fuel use. Nationwide, EPA estimates an increase in total emissions of volatile organic compounds and nitrogen oxides (VOC + NOx) between 41,000 and 83,000 tons. However, the effects will vary significantly by region. Areas that already are using ethanol will experience little or no change in emissions or air quality. However, those areas that experience a substantial increase in ethanol may see an increase in VOC emissions between 4 and 5 percent and an increase in NOx emissions between 6 and 7 percent from gasoline powered vehicles and equipment. "

"The societal cost to produce a gallon of gasoline is estimated to rise between 0.5 cent and 1.1 cents, though the presence of the excise tax credit for ethanol will result in a net savings for fuel customers at the pump of 0.4 to 0.7 cents per gallon. "

"Net U.S. farm income is estimated to increase by between $2.6 and $5.4 billion."