Government policies increasingly promote ethanol and other biofuels for security, air quality, and climate benefits. One chapter of this dissertation develops a model that links the distribution of preferences for ethanol to aggregate price responses and then estimates the model using data from a large number of retail ethanol stations. Ethanol demand is sensitive to relative fuel prices with a mean elasticity 2.5--3.0. The estimates imply that preferences for ethanol are heterogeneous, rather than homogeneous, as previous literature assumes. Accounting for this heterogeneity cuts the estimated cost of a minimum market share standard for ethanol in half, because households with strong preferences do not require large subsidies to choose ethanol over gasoline. Similar intuition likely applies for policies designed to promote other ;;green;; substitutes, such as electricity from renewable sources. Even so, the cost of the ethanol standard exceeds benefits by a wide margin, implying that the policy is harmful. Researchers should focus on marginal households when assessing the impact of policy, because assuming mean preferences can generate misleading results. Another chapter of this dissertation analyzes the market for flexible-fuel vehicles. Corporate Average Fuel Economy (CAFE) regulations feature a ;;loophole;; that credits gasoline-ethanol flexible-fuel vehicles with far better mileage than they actually achieve. Empirical evidence shows that firms affected by CAFE standards produce flexible-fuel vehicles to exploit this loophole and that marginal consumers do not value flexible-fuel capacity. Under these and other conditions an automaker will equate the marginal cost of improving mileage using flexible-fuel vehicles with the marginal cost of improving mileage through other means. This insight implies that one can infer the marginal cost of complying with CAFE standards for automakers that produce flexible-fuel vehicles. Based on this approach, the estimated cost of tightening CAFE standards by one mile per gallon is at most $10--$20 in lost profit per vehicle for domestic automakers, assuming incremental production costs of $100--$200 for flexible-fuel vehicles. These are valuable estimates for economists and regulators, as automakers may overstate costs to avoid tighter standards.
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