A biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices, depending on relative supply elasticities. Biofuel tax credits always reduce fuel prices. Tax credits result in lower fuel prices than under a mandate for the same level of biofuel production. If tax credits are implemented alongside mandates, then tax credits subsidize fuel consumption instead of biofuels. This contradicts energy policy goals by increasing oil dependency, CO2 emissions, and traffic congestion, while providing little benefit to either corn or ethanol producers. These social costs will be substantial with tax credits costing taxpayers $28.7 billion annually by 2022.

The efficacy of alternative biofuel policies in achieving energy, environmental and agricultural policy goals is assessed using economic cost‐benefit analysis. Government mandates are superior to consumption subsidies, especially with suboptimal fuel taxes and the higher costs involved with raising tax revenues. But subsidies with mandates cause adverse interaction effects; oil consumption is subsidized instead. This unique result also applies to renewable electricity that faces similar policy combinations. Ethanol policy can have a significant impact on corn prices; if not, inefficiency costs rise sharply. Ethanol policy can increase the inefficiency of farm subsidies and vice‐versa. Policies that discriminate against trade, such as production subsidies and tariffs, can more than offset any benefits of a mandate. Sustainability standards are ineffective and illegal according to the WTO, and so should be re‐designed.

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A framework is developed to analyze the effects of a biofuel consumer tax exemption and the interaction effects with a price contingent farm subsidy. Ethanol prices rise above the gasoline price by the amount of the tax credit. Corn farmers gain directly while gasoline consumers only gain from any reduction in world oil prices due to the extra ethanol production. Domestic oil producers lose. Historically, the intercept of the ethanol supply curve is above the gasoline price. Hence, part of the tax credit is redundant and represents "rectangular" deadweight costs that dwarf triangular deadweight cost measures of traditional farm subsidies.

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This paper goes beyond orthodox considerations of direct payment e®ects on agricultural output, by highlighting the role of subsidies in a®ecting individual producers' ability to cover¯xed costs, and in distorting the volume of aggregate production and net trade by implicitly discouraging exits. The theoretical model considers both taxpayer and consumer¯nanced decoupled direct payment schemes and compares them to a coupled production subsidy. In terms of possible producer responses to direct payments, we propose an analytical framework of production decision-making in the presence of a stochastic distribution of¯xed costs across representative farms. We show that decoupled payments in theory can have a larger e®ect on output than coupled payments. The model explicitly recognizes three consequences of domestic support: (a) induce exit or entry; (b) bias production incentives to domestic markets; and (c) cross-subsidize export in global markets. An empirical model of the U.S. wheat sector is developed to illustrate the relative potential impacts of coupled versus decoupled payments on output through the e®ects on a farmer's ability to cover¯xed costs and hence exit decisions.