Wednesday, August 28, 2013

Government Regulation and Gas Prices

The New York Times reports that a surplus of ethanol is causing higher ethanol prices and is resulting an increase in gasoline prices.  Yes, I wrote that correctly.  Typically, a surplus would result in a decrease in the price of the good, but here's the catch.  The US government requires gas producers to purchase a percentage of ethanol production (i.e. the ethanol quota), and as the amount of ethanol produced increases and the amount of gasoline demanded decreases, then the price of ethanol starts to rise as gasoline producers choose to by ethanol credits (but not ethanol) which is passed on to gasoline consumers in higher prices.  Why - government regulation.

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