Inefficiency and Misinformed Investment in Ethanol: Arguing misunderstood scale efficiency and misallocated investment in domestic ethanol production including an NIE treatment of vertical integration.
Production of corn-based ethanol in the United States has driven unprecedented investment in rural economies since the late 1990s. With the establishment of the "renewable fuels mandate" in the President's 2005 Energy Policy Act funding for domestic production and a national market demand have stabilized. Currently the industry is rolling-back investment plans and scaling down proposed developments and expansions of existing plants. This paper uses a New Institutional Economic analysis to explain how vertical integration benefits large production facilities. Further it reinforces current arguments on the relative local impacts of these large production sites should they come to dominate the industry. Proponents of corn ethanol argue that decentralized domestic energy production can offset our energy insecurity from imported fossil fuels while creating new demand for agricultural inputs improving local rural economies. The paper shows the fallacies of these assumptions, namely that industry dynamics tend towards large centralized production which minimizes relative local economic impact, decreases input prices, and exacerbates rural instability by undercutting less cost-effective but more socially beneficial producer-owned cooperatively organized ethanol production.
Date of Completion
Scoll, M. B., "Inefficiency and Misinformed Investment in Ethanol: Arguing misunderstood scale efficiency and misallocated investment in domestic ethanol production including an NIE treatment of vertical integration." (2007). Economics Theses. 54.