CGE assumptions under scrutiny: uncertainty in the ethanol promotion policy in Mexico

Based on a CGE exercise of a subsidy to initiate ethanol production in Mexico, we use Monte Carlo simulations for consumer demand elasticities and ethanol cost estimates. The analysis provides three conclusions: when markets vary smoothly and predictably, Monte Carlo methods can then help to gauge the actual probability that a given program will achieve a desired outcome. Second, secondary markets may display little or no sensitivity to these parameter variations. Finally, a ‘razor’s edge’ outcome with no positive benefits if a critical parameter falls below some critical value, reveals that an economic policy may not be conducive to ‘fine tuning’ by marginal adjustments.