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Comments on: Biofuel regulation and price http://www.tvhe.co.nz/2008/06/24/biofuel-regulation-and-price/ The Visible Hand in Economics Thu, 18 Dec 2008 04:20:22 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Is doing nothing better than doing a little? | TVHE http://www.tvhe.co.nz/2008/06/24/biofuel-regulation-and-price/#comment-4617 Thu, 18 Dec 2008 04:20:22 +0000 http://tvhe.wordpress.com/?p=436#comment-4617 […] The regulations did distort the incentives of producers to invest in green technology as Matt has previously written about. Removing the distortions and implementing a carbon market is probably […]

]]> By: Matt Nolan http://www.tvhe.co.nz/2008/06/24/biofuel-regulation-and-price/#comment-1602 Mon, 23 Jun 2008 22:54:37 +0000 http://tvhe.wordpress.com/?p=436#comment-1602 “If Biofuels were going to be cheaper wouldn’t fuel companies have already done this without the government?”

Good point. My answer would be as follows.

It is possible that, given the choice to invest in infrastructure, firms would choose the low fixed cost, high marginal cost option if it offers higher profits as an firm structure. However, if the government makes them choose the high fixed cost, low marginal cost option then they have too.

Now, fixed costs don’t impact on prices – its all marginal costs. So by being forced to invest in expensive infrastructure, the firm will now sell a product at a lower price – as their marginal costs are lower. Note that the aggregate result assumes that they are making sufficient profits such that there will not be mass exit from the industry (that is the “long-run” concern I raised).

Notice the fuel companies are unambigiously worse off following this policy – however the direction of the price change is ambiguous (at the most general level).

]]> By: Steve http://www.tvhe.co.nz/2008/06/24/biofuel-regulation-and-price/#comment-1601 Mon, 23 Jun 2008 22:47:00 +0000 http://tvhe.wordpress.com/?p=436#comment-1601 One thing with this that doesn’t agree with me. If Biofuels were going to be cheaper wouldn’t fuel companies have already done this without the government? There has been nothing stopping petrol companies from selling biofuels in the past and if there was a cost saving by selling a biofuel blend then surely a petrol company would have already done it.

Therefore biofuels must be more expensive and fuel costs must go up accross the board.

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