Conclusion

The research presented addresses three interdependent topics, namely, agricultural subsidies, the ethanol market, and the corn market. A model for corn demand was estimated using a TSLS instrumental variable method yielding the elasticity of demand for corn as well as the cross price elasticity of corn with respect to ethanol. These estimates were then used in unison with a previous study’s estimated elasticity of supply for corn to show the effect a given percent increase in the price of ethanol has on the equilibrium price of corn.

            The importance of each conclusion made in this study is self-evident. Subsidies are ideally used to facilitate some social benefit existing beyond the private cost-benefit structure. This benefit would otherwise go unutilized if not for government intervention. Governmental support of such goods then brings about a more efficient or optimal outcome. In order to better understand whether these billions of tax dollars poured into the corn industry every year represent economic waste, a better understanding of the social benefits of corn production must be achieved. The burden of proof, demonstrating some social benefit in the production of corn, must then be satisfied before government legislation manipulates corn markets. If there exists some social benefit to corn production, subsidization of the corn industry may well be justified. However, if private production is correctly aligned with the theoretical social costs and benefits of corn production, agricultural subsidies necessarily lead to an inefficient outcome, transferring wealth from taxpayers to corn producers.

References