Meen Boriboune 9/19/2011 For this formal assignment, I chose to do the preparation of a demand and supply analysis of the

subsidy for blending ethanol into gasoline in The Politics of Subsidies and Tariffs Case Study. As seen in the graph, subsidy given by the government causes an increase in the quantity of ethanol produced using U.S. corn. In the graph, a subsidy of $1 per gallon of ethanol obtained from the U.S. corn decreases the U.S. producers marginal cost by $1 because they receives $1 from the government for each gallon sold. This shifts down their supply curve $1 to S, so the market moves to the intersection of S and D, increasing the quantity from Q. to Q1. The effect of the action is that the consumers now pay less for the ethanol, which means the producer surplus will increase. The producers now receive a higher price for their output. They get P1 plus subsidy, so theyre producing more and getting a higher price (meaning the producer surplus has increased). Although there is a financial cost to the government, which is paid by the innocent tax payers whether they uses the ethanol or not, that was mentioned in the article. Overall welfare effect on government subsidy: people who benefits are the consumers who purchase the ethanol at a lower market price and producers of the ethanol from the U.S. corn (their net revenue is higher leading to an increase in producer surplus.) People who are hurt by this subsidy from the government are 1.) The general taxpayers who will have to fund the subsidy which will generate long term rise in taxation. 2.) Other producers of the same industries (other clean alternatives) not in receipt of a subsidy. 3.) Higher government spending which could be used in alternative ways.

Despite the fact that subsidy generates negative net benefits for the country, it is likely to be politically successful because corn farmers care much more about the issue than regular people/voters. As mentioned in the article How the senators vote on ethanol will be carefully watched by corn farmers but rationally ignored by most constituents. Also another factor is that the first vote in the presidential primaries is the Iowa caucus. The article explains how the candidates or running presidents usually recognizes the political cost of voting against an ethanol subsidy. Overall the benefit from subsidy is large for the producers and it promotes certain incentives for certain people in affected regions. But the consequences of the loss per person for the majority of the tax payers are small, therefore people failed to see the loss over the benefits even though subsidies overall generates negative net benefits for the country.