Which of the following best explains why the US government has subsidized ethanol production since 1978?

• A. To reduce government spending on renewable energy
• B. To discourage the use of alternative fuels
• C. To increase the market price of corn for domestic farmers
• D. To address the negative externalities associated with gasoline consumption

Answer: (D)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a third party is affected by the production or consumption of a good, and these effects are not reflected in market prices. Negative externalities impose costs on society, such as pollution from gasoline consumption.
2. Recognize why the government intervenes: When negative externalities exist, the market outcome is inefficient because the social cost exceeds the private cost. The government may subsidize alternatives to reduce these external costs and improve social welfare.
3. Identify ethanol as an alternative fuel: Ethanol is a renewable fuel that can reduce harmful emissions compared to gasoline, thus addressing the negative externalities of gasoline consumption.
4. Analyze the purpose of the subsidy: By subsidizing ethanol production, the government lowers the cost of ethanol, encouraging its use over gasoline, which helps reduce pollution and other negative external effects.
5. Evaluate the incorrect options: Subsidies are not intended to reduce government spending or discourage alternative fuels; rather, they aim to correct market failures caused by negative externalities, such as those from gasoline use.