However, many pundits have said that ethanol is neither good for the environment nor efficient from an economic policy perspective (see the following from the Cato Institute).
Why then do we subsidize this particular form of fuel additive instead of a (possibly) better alternative?
I tried to stress three points to students:
- The subsidies (which can be very substantial!) are concentrated to a few individuals (Archer Daniels Midland comes to mind) and the costs are dispersed amongst millions of consumers and taxpayers. No one will march on Washington to save a few dollars but companies will use vast resources to obtain these subsidies.
- Voters tend to not realize the extent of such subsidies because acquiring the knowledge can consume vast amounts of time. This is what public choice scholars refer to as rational ignorance (see this article by Walter Williams on the subject).
- Firms will engage in rent-seeking given points #1 and #2. Rent-seeking is the expenditure of resources to try and obtain government favors at the expense of others.