Summary

In this article, the government of Brazil had to implement a price ceiling, which is to control and lower down the prices of the gasoline in order to become competitive with ethanol. For now, the oil prices has decreased by half or more and has impacted ethanol negatively as it is a substitute. (Bloomberg, 2015)

Majority of the car in Brazil consume either ethanol or gasoline and the drivers usually pick the fuel which offers them the best price as consumers are sensitive to price elasticity.

Due to the lower price of the gasoline, most of the ethanol mills had to close up and also be placed under bankruptcy protection as the business could not continue any further, the cars that were consumed with ethanol only takes up 36% with a slump from 82% in 2009 because of high price of ethanol. Therefore, creating surplus as the quantity demanded is lower than the quantity supplied.

The ethanol producer has voiced out that the price of the gasoline has to be kept above for some time to recover the losses. After implementing a tax on the fuels, the prices of fuel has gone up to $1.01 from $ 0.97 so that the ethanol producer that was unaffected by the tax can be equal to the rise. This action has helped the ethanol industry in boosting profit as it only rises from $ 0.65 to $ 0.68.