Teaching ethanol economics

I don't require my students to purchase the WSJ, it seems like a tremendous waste, stacks of WSJ's pile up, unread ... and that is just in my office. However, the WSJ online edition is a great investment, both for research and teaching. And I get the weekly review in my email inbox that helps me avoid the wasteful search for articles:

Dear John Whitehead:

This week's issue of The Weekly Review: Microeconomics features 3 articles. The highlighted topics are: Environmental Economics, Asymmetric Information, and Gambling.

This week's articles are:
1. Twisted Economics of Ethanol
2. Economists Learn to Play Matchmaker
3. The Man Who Shook Up Vegas

As the spring term kicks off, please keep in mind that http://www.professorjournal.com provides The Wall Street Journal order forms and free teaching tools for use in the classroom. Remember, students get both print and online access at our lowest rates, and you receive a one-year complimentary subscription when 10 or more students sign up.

The summary and discussion questions, prepared by James Dearden at Lehigh University, are below the fold.

TITLE: Twisted Economics of Ethanol
REPORTER: Robert Cyran and Martin Hutchinson
DATE: Jan 06, 2007
PAGE: B14
LINK: http://online.wsj.com/article/SB116803682797668601.html?mod=djem_jiewr_ec
TOPICS: Environmental Issues, Environmental Regulation, International Trade

SUMMARY: (This article is located after the Razr article) The U.S. federal government policy of subsidizing ethanol production has been justified on two grounds:  energy independence and the environmental benefits of biofuels.  U.S. policy, however, results in the high-cost of biofuels produced in the U.S. While U.S. oil companies could use lower-cost sugar-based biofuel (which is produced outside of the U.S.), the high tariffs on these fuels prevents the oil companies from doing so.  Instead, the U.S. turns to corn- and soybean-based fuels.  The difficulty with these crops is that they are not good inputs for the production of biofuels.  Sugar cane produces as much as 10 times the energy required to produce it, while corn-based ethanol makes only 1.3 times its cost of production.  The U.S. trade and agricultural policies combined with the federal government's requirement that bioethanol make up 10% of gasoline has resulted in the higher prices of corn and soybeans.

QUESTIONS:
1.) Why does the federal government require oil refiners to mix ethanol into gasoline?  Discuss the negative externalities of gasoline consumption.

2.) Why has the federal government placed a tariff on the importation of sugar cane-based biofuel?  Which U.S. group benefits from the U.S. biofuel regulation and the tariffs on sugar cane products?  Which U.S. groups are harmed?

3.) Should the federal government have placed a tariff on the importation of sugar cane-based biofuel?  What is the effect of these tariffs on the price of the ethanol-gasoline mixture?

Reviewed By: James Dearden, Lehigh University

As Rainman/Raymond might say: "I'm an excellent teacher."