Ethanol Mandates Congress has passed laws requiring that a ...

[tth]

Ethanol Mandates Congress has passed laws requiring that a certain percentage of retail gasoline be from ethanol produced from corn. How would this destroy wealth?

Question 2

Securities Taxes Congress has proposed a new tax on any transactions of securities traded on Wall Street. How would this destroy wealth?

[jordangronback]

Answer to Question 1

This regulation is mandating the movement of corn from a higher value use such as food, sugar, etc to a lower value use of gasoline (If gasoline was the highest value use you would not require a mandate) In addition, the required use of ethanol means that petroleum from oil is not being refined. The mandate moves a high valued asset, oil, into lower, unrefined, uses. Note: The use of oil also causes pollution, an additional cost to society. If refiners would choose to use ethanol if they bore these pollution costs, then wealth may have been created.

Answer to Question 2

In order for both the buyer and seller to benefit from a transaction the bid price the buyer is willing to pay must exceed the ask price the seller is willing to accept. With the new tax, this spread between bid and ask must be large enough to also cover the new transactions tax. This means that potential transactions in which the bid-ask spread is positive but not larger than the tax will not be consummated. Thus, the tax prevents an asset from moving to a higher valued use. Note: Congressional spending requires the imposition of taxes. On balance, this could increase wealth if society values government services by more than the tax revenue collected plus the loss due to these unconsummated transactions.