† The authors would like to thank the financial support provided by Fundação de Apoio à Pesquisa do Estado da

In response to the oil shocks during the 1970s and the consequent deterioration of the country’s balance of payments, the Brazilian government channeled efforts to the exploration of off-shore oil basins and to stimulating the use of biofuels in place of gasoline and diesel. The government national ethanol program aimed at reducing the consumption of fossil fuels by imposing the addition of dehydrated alcohol to the gasoline used in Otto cycle engines and by stimulating the production and use of hydrated alcohol fueled vehicles. Over the years, as the production of ethanol increased, the technological improvements in agricultural techniques and in the industrial production of ethanol promoted significant cost reduction, even when the lower energetic density of this biofuel is taken into account. Since 2003, light vehicles which allow consumers to use hydrated alcohol or gasoline as fuels started being sold in Brazil, increasing dramatically the market for ethanol in the country. Using a dynamic model with panel data including all Brazilian federal states, this paper estimates an econometric model to measure the effect of the introduction of this flex fuel technology on the demand for gasoline in Brazil. The results indicate the expansion of ethanol’s participation in the fuels market has led to a substantial increase in the price and cross-price elasticity of the demand for gasoline