Abstract
We discuss the analysis of policy in three “spaces”: the customary (q, p) space, “policy space,” and “welfare space.” Specific advantages of conducting policy analysis in welfare and policy spaces are as follows: (1) it makes clearer the distributional consequences of policy change instead of focusing solely on the aggregate welfare consequences of policy change; (2) it facilitates covering a very wide array of available policy options, instead of examining just a few; (3) it is a powerful tool for analyzing the effects of simultaneous use of multiple policy instruments; and (4) it clarifies what it means for policies to be more/less “efficient,” and for policy instruments to make each other more/less “efficient.” We demonstrate the usefulness of our framework in comparing and critiquing various conclusions recently expressed in the U.S. ethanol policy literature.
Online Appendix
Please see the accompanying Mathematica program, presented in a pdf file.
Nomenclature
Variables in italics, vectors in boldface.
- x = (x1,…, xm)
: a vector of generic policy instrument
- X⊆Rm
: set of feasible policies
- α = (α1,…, αz)
: the model’s parameters that change how welfare is a function of policy
- i = 1,…, I
: index for mutually exclusive groups representing economics agents in the model, W = {1,…, I}: the model’s set of groups
- hi: X × A → R
: function that defines how group i’s welfare is dependent on policy and market parameters
: the model’s welfare correspondence
: welfare manifold of an economic model that has policy space X and is parameterized by α
: for generic subsets Xsub⊆X and Wsub⊆W, the welfare submanifold of an economic model that has policy space X and is parameterized by α
- In (q, p)-space
- PTyear
: value of the target price for an investigated year (policy instrument on commodity market)
- tyear
: value of the ethanol tax credit for an investigated year (policy instrument on ethanol market)
- tc(PT, α)
: minimum ethanol tax credit that is effective when the corn target price is PT
- αyear
: vector of parameter values in the investigated crop year
- DNEdom(z, αyear)
: domestic demand for corn in non-ethanol uses
- DNE(z, αyear)
: total demand (domestic demand plus foreign excess demand) for corn in non-ethanol uses
- SC(z, αyear)
: domestic corn supply curve,
- ESC(z, PTyear, αyear)
: domestic corn-supplied-to-ethanol curve
- ESF(z, α03)
: foreign excess-supply-of-fuel curve
- PCSyear, PCDyear
: producer (S) and consumer (D) corn price
- PNE(αyear)
: equilibrium corn price
- PFWyear
: world fuel price
- ΔPSc(PTyear, tyear, αyear)
: change in corn producers’ surplus
- ΔCTdom(PTyear, tyear, αyear)
: change in domestic corn consumers’ surplus
- DWdom(PTyear, tyear, αyear)
: deadweight costs
- In policy space
: a non-intervention policy (na stands for no-action by government)
: observed policy in year y
- X = Xna∪X1 ∪X2 ∪X3
: the union of four non-intersecting subsets, each subset represents the combination of effective policy instruments
- In welfare space
- h(PT, t, α)≡(ΔCTdom(PT, t, α), ΔPSc(PT, t, α))
: the correspondence h maps any (target price, tax credit, parameter vector) ordered triple (PT, t, α) onto welfare space
- H(YZ, αyear), which we denote STC(PT, t, αyear)
: the surplus transformation curve for the set YZ (here is an example), which is a set of policy instruments
- ∆ux
: welfare outcome for a given combination of policy instruments
References
Babcock, B. A. 2008. “Distributional Implications of U.S. Ethanol Policy.” Review of Agricultural Economics30:533–42.10.1111/j.1467-9353.2008.00428.xSearch in Google Scholar
Baker, M. 2008. “Welfare Changes From the U.S. Ethanol Tax Credit: The Role of Uncertainty and Interlinked Commodity Markets.” Ames.Search in Google Scholar
Becker, G. S. 1983. “A Theory of Competition among Pressure Groups for Political Influence.” The Quarterly Journal of Economics98:371–400.10.2307/1886017Search in Google Scholar
Bourgeon, J.-M., and D.Tréguer. 2010. “Killing Two Birds with One Stone: US and EU Biofuel Programmes.” European Review of Agricultural Economics37:369–94.10.1093/erae/jbq025Search in Google Scholar
Bullock, D. S.1992. “Redistributing Income Back to European Community Consumers and Taxpayers through the Common Agricultural Policy.” American Journal of Agricultural Economics74:59–67.10.2307/1242990Search in Google Scholar
Bullock, D. S.1994. “In Search of Rational Government: What Political Preference Function Studies Measure and Assume.” American Journal of Agricultural Economics76:347–61.10.2307/1243648Search in Google Scholar
Bullock, D. S.1995. “Are Government Transfers Efficient? An Alternative Test of the Efficient Redistribution Hypothesis.” Journal of Political Economy103:1236–74.10.1086/601450Search in Google Scholar
Bullock, D. S., F. H.Bordey, W.Bowser, E.Kandpal, and B.Wood.2013. “Welfare Manifolds and Efficiency in Models of Political Economy: an Application to the Analysis of Becker (1983).” Working paper, University of Illinois Department of Agricultural and Consumer Economics.Search in Google Scholar
Bullock, D. S., and K.Salhofer. 1998. “A Note on the Efficiency of Income Redistribution with Simple and Combined Policies.” Agricultural and Resource Economics Review27:266–9.10.1017/S1068280500006584Search in Google Scholar
Bullock, D. S., and K.Salhofer. 2003. “Judging Agricultural Policies: A Survey.” Agricultural Economics28:225–43.10.1111/j.1574-0862.2003.tb00140.xSearch in Google Scholar
Bullock, D. S., K.Salhofer, and J.Kola. 1999. “The Normative Analysis of Agricultural Policy: A General Framework and Review.” Journal of Agricultural Economics50(September 1999): 512–35.10.1111/j.1477-9552.1999.tb00896.xSearch in Google Scholar
Cui, J., H.Lapan, G.Moschini, and J.Cooper. 2011. “Welfare Impacts of Alternative Biofuel and Energy Policies.” American Journal of Agricultural Economics93(5):1235–56.10.1093/ajae/aar053Search in Google Scholar
De Gorter, H., and D. R.Just. 2008a. “The Economics of the U.S. Ethanol Import Tariff with a Blend Mandate and Tax Credit.” Journal of Agricultural & Food Industrial Organization6:1–21.10.2202/1542-0485.1239Search in Google Scholar
De Gorter, H., and D. R.Just. 2008b. “‘Water’ in the U.S. Ethanol Tax Credit and Mandate: Implications for Rectangular Deadweight Costs and the Corn-Oil Price Relationship.” Review of Agricultural Economics30:397–410.10.1111/j.1467-9353.2008.00413.xSearch in Google Scholar
De Gorter, H., and D. R.Just. 2009. “The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies.” American Journal of Agricultural Economics91:477–88.10.1111/j.1467-8276.2008.01190.xSearch in Google Scholar
De Gorter, H., and D. R.Just. 2010. “The Social Costs and Benefits of Biofuels: The Intersection of Environmental, Energy and Agricultural Policy.” Applied Economic Perspectives and Policy32:4–32.10.1093/aepp/ppp010Search in Google Scholar
Du, X., D. J.Hayes, and M. L.Mallory. 2009. “A Welfare Analysis of the U.S. Ethanol Subsidy.” Review of Agricultural Economics31:669–76.10.1111/j.1467-9353.2009.01460.xSearch in Google Scholar
Gardner, B. 1983. “Efficient Redistribution through Commodity Markets.” American Journal of Agricultural Economics65:225–34.10.2307/1240868Search in Google Scholar
Gardner, B. 2007. “Fuel Ethanol Subsidies and Farm Price Support.” Journal of Agricultural & Food Industrial Organization5:Article 2.10.2202/1542-0485.1188Search in Google Scholar
Grossman, G. M., and E.Helpman. 1994. “Protection for Sale.” The American Economic Review84:833–50.Search in Google Scholar
Harsanyi, J. C. 1963. “A Simplified Bargaining Model for the N-Person Cooperative Game.” International Economic Review4:194–220.10.2307/2525487Search in Google Scholar
Harsanyi, J. C. 1977. Rational Behavior and BargainingEquilibrium in Games and Social Situations. Cambridge: Cambridge University Press.10.1017/CBO9780511571756Search in Google Scholar
Josling, T. E. 1974. “Agricultural Policies in Developed Countries: A Review.” Journal of Agricultural Economics25:229–64.10.1111/j.1477-9552.1974.tb00547.xSearch in Google Scholar
Kola, J. 1993. “Efficiency of Supply Control Programmes in Income Redistribution.” European Review of Agricultural Economics20:183–98.10.1093/erae/20.2.183Search in Google Scholar
Lapan, H., and M.Giancarlo. 2009. “Biofuels Policies and Welfare: Is the Stick of Mandates Better Than the Carrot of Subsidies?” Working Paper No. 09010. Ames.Search in Google Scholar
Lapan, H., and M.Giancarlo. 2012. “Second-Best Biofuel Policies and the Welfare Effects of Quantity Mandates and Subsidies.” Journal of Environment Economics Management63:224–41.10.1016/j.jeem.2011.10.001Search in Google Scholar
Mallory, M. L. 2011. “Alternative Biofuel Policies: An Economic Comparison.” Biofuels2:267–76.10.4155/bfs.11.13Search in Google Scholar
Mas-Colell, A., M. D.Whinston, and J. R.Green. 1995. Microeconomic Theory. New York: Oxford University Press.Search in Google Scholar
Mérel, P. R. 2009. “On the Deadweight Loss of Production Requirements for Geographically Differentiated Agricultural Products.” American Journal of Agricultural Economics91:642–55.10.1111/j.1467-8276.2009.01272.xSearch in Google Scholar
Schmitz, A., C. B.Moss, and T. G.Schmitz. 2007. “Ethanol: No Free Lunch.” Journal of Agricultural & Food Industrial Organization5:Article 3.10.2202/1542-0485.1186Search in Google Scholar
Tullock, G. 1967. “The Welfare Costs of Tariffs, Monopolies, and Theft.” Western Economic Journal3:224–32.10.1111/j.1465-7295.1967.tb01923.xSearch in Google Scholar
Wolfram Research.. 2010. Mathematica, Technical and Scientific Software. Champaign, IL. http://www.wolfram.com/.Search in Google Scholar
©2014 by De Gruyter
