Economist's Perspective on Biofuels

Economics is a discipline that aims to analyze resource allocation by individuals and societies. It investigates allocation choices by individuals, which may include purchases, employment, life decisions, as well as resource allocations by firms and governments. It also aims to explain and evaluate outcomes of markets and selection of policies. Economists distinguish between choices that are optimal from the perspective of individual agents and choices that are optimal from a social perspective. They suggest policies that will induce private choices to coincide with social optimum. However, economists do not run the world and actual policy choices are typically different from what economists prescribe. Often then, the economist is charged with the task of assessing the impact of actual policies and proposing ways to improve them. Although tools of the trade are used to analyze the economics of biofuel, the body of information and the subsequent conclusions that are arrived at are often as diverse. We will use the basic tools of supply and demand to understand how biofuels fit within a stylized market for energy, and explore how climate change considerations may affect biofuel utilization. Then, we expand our analysis to deal with the impact of biofuel on food and fuel choices, followed by an analysis of actual biofuel policies while taking into account political economy considerations as well as uncertainty and enforcement issues. Finally, we provide an overview of results of some quantitative studies that predict the outcomes of introducing biofuels and assess their future.