%0 Report
        %A Bandyopadhyay, Subhayu
%A Bhaumik, Sumon K.
%A Wall, Howard J.
        %T Biofuel Subsidies: An Open-Economy Analysis
        %D 2009
        %8 2009 Nov
        %I Institute of Labor Economics (IZA)
        %C Bonn
        %7 IZA Discussion Paper
        %N 4584
        %U https://www.iza.org/index.php/publications/dp4584
        %X 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.
        %K pollution externality
%K Pigouvian tax
%K optimal biofuel subsidy
%K terms-of-trade