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    Ethanol Economics

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    Brazilian ethanol producers (who make ethanol from sugarcane) have lower production costs than U.S. producers. Indeed, even though it costs 16 cents per gallon to transport ethanol from Brazil to the United States, which also imposes and import tariff of nearly 60 cents per gallon on Brazilian ethanol, the United States still imports about 60 million gallons of ethanol per year from Brazil. If congress really cares about protecting the environment and reducing our reliance on foreign crude oil, why do you suppose we have a large import tariff on ethanol?

    If imports of Brazilian ethanol begin to rise sharply in the future, what do you predict will happen to the size of the import tariff levied on this good?

    Why do you suppose it is owners of fertile farmland who are given special treatment by the federal government, rather than, say, automobile mechanics?

    Use the theory of rational ignorance to explain why the ethanol subsidy is only 51 cents per gallon rather than, say, $5 per gallon.

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    Solution Preview

    If Brazil imported more ethanol, it would drive the price down. This would cause outrage amongst US ethanol producers, who would lobby the government to increase the tariff.

    Crop subsidies date back to the Depression, when many farmers were ruined by low crop prices. The feeling behind them is that farmers place themselves in economic jeopardy every year in order to put food on our tables. We need to provide them with some security. In addition, owners of ...