Benefit-Cost Analysis of Ethanol

Economic Viability

Impact of Government Regulation

The economic viability of corn based ethanol production can be based largely on a cost-benefit analysis of the production process. Based on current production technologies the costs of producing corn based ethanol far outweigh how much it is worth in the market, however this is offset by the close to $3 billion per year in government subsidies that are applied to the industry. Without the support from state and local governments it is likely that the production of corn based ethanol would cease completely.

On a firm level the production of corn based ethanol is also seen as economically inefficient. A study by the University of Nebraska found that even when tax credits are subtracted from the costs for a 100- MGY plant profits are only predicted to exists until 2012 at which point costs will begin to outweigh the benefits. This will push the plant past the break even point and make the continued production of ethanol economically unviable. This is due in part to forecasts that corn prices will continue to rise while ethanol prices will fall. It is also important to note that the market price of ethanol is largely a result of the Renewable Energy Standard which creates a demand for ethanol which would otherwise not be present. Without this government regulation the demand, and therefore the price for ethanol would likely drop significantly, further reducing profit margins