The relationship between ethanol, corn and oil prices are analyzed under two alternative situations, depending on whether or not consumers purchase ethanol on the basis of its contribution to mileage. In all cases, market prices of ethanol can be above or below the consumer price paid for ethanol. The paper extends de Gorter and Just's concept of "water" in the tax credit to include the premium due to a binding mandate. The resulting rectangular deadweight costs are estimated for the past 25 years and are found to dwarf standard triangular deadweight cost measures of traditional farm subsidies.
De Gorter, H. and D.R. Just. "'Water' in the U.S. Ethanol Tax Credit and Mandate: Implications for Rectangular Deadweight Costs and the Corn-Oil Price Relationship." Available at SSRN, Dec 2007.
