This study quantifies the impact of increasing ethanol production on wholesale/retail gasoline prices employing pooled regional time-series data from January 1995 to March 2008. We find that the growth in ethanol production kept wholesale gasoline prices $0.14/gallon lower than would otherwise have been the case. The negative impact of ethanol on retail gasoline prices is found to vary considerably across regions. The Midwest region has the biggest impact at $0.28/gallon, while the Rocky Mountain region had the smallest impact at $0.07/gallon. The results also indicate that the ethanol-induced reduction in gasoline prices comes at the expense of refiners’ profits. We find a net welfare loss of $0.5 billion from the ethanol support policies in multiple markets.

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Xiaodong Du
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