Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/35888
Authors: 
Bandyopadhyay, Subhayu
Bhaumik, Sumon Kumar
Wall, Howard J.
Year of Publication: 
2009
Series/Report no.: 
IZA Discussion Papers 4584
Abstract: 
We present a general equilibrium analysis of biofuel subsidies in an open-economy context. In the small-country case, when a Pigouvian tax on conventional fuels such as crude is in place, the optimal biofuel subsidy is zero. When the tax on crude is not available as a policy option, however, a second-best biofuel subsidy (or tax) is optimal. In the large-country case, the optimal tax on crude departs from its standard Pigouvian level and a biofuel subsidy is optimal. A biofuel subsidy spurs global demand for food and confers a terms-of-trade benefit to the food-exporting nation. This might encourage the food-exporting nation to use a subsidy even if it raises global crude use. The food importer has no such incentive for subsidization. Terms-of-trade effects wash out between trading nations; hence, any policy intervention by the two trading nations that raises crude use must be jointly suboptimal.
Subjects: 
Optimal biofuel subsidy
Pigouvian tax
terms-of-trade
pollution externality
JEL: 
F1
H2
O1
Document Type: 
Working Paper

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