Subsidies/Tariffs Question

Economics Economics Questions
1

Hello,

I am new to austrian economics (and economics in general). I have read Economics for Real People and Economics in One Lesson, and have a question regarding free markets with subsidies and tarrifs.

In Hazlitt’s book, he has a section describing how tariffs can be bad. Let’s say we produce a good in the free market, and our market price is $15. A country we trade with is better at it, and produces the good at $10. Hazlitt asserts that if we apply a $5 tariff to the imported good to make us competitive, we distort the market and essentially prop up a market that should not exist. If we buy the imported good at $10, everyone has $5 in his pocket to spend on other goods, and our bad market goes away cause they can’t produce it cheap enough. So far so good.

Let’s say that instead of them being better at producing the good, they are actually subsidized. Suppose their unsubsidized market price would be $20 for that good, but in order to have a global presence and import less, the government subsidizes the producers, and they can sell at $10. Over here in a free market, we do not add a tariff and the market pushes out our producers in favor of theirs. Our consumptions adds demand to their market, and their prices start going up. Their government, originally intervening to make them competitive and reduce imports, being successful in that task, reduce or remove their subsidies. Their market price heads back towards $20 (because they are actually inefficient at producing it profitably at $15 like before), and now our market has to pay that over here since it previously determined that over $15 was too much to pay.

This looks like a great opportunity to for an entrepreneur to make some money. So our now defunct market for this product starts to ramp up again, and we can start selling it for the $15. We increase the other countries imports, and reduce their global presence. Their government does not like that and subsidizes to make them competitive. Rinse and repeat.

With government intervention, we have inefficient markets and incorrect prices/supply/demand. Without government intervention, we have pretty much the same thing (we can’t control the distortions by other countries), but also a clear business cycle, and a market that is at a disadvantage globally overall (because we keep leaving and coming back again).

What kind of policy (if any) should the state have on this? How does the market handle distortions without business cycles? Do I even come close to understanding this?

Thanks,

Aaron

2

Their government, originally intervening to make them competitive and reduce imports, being successful in that task, reduce or remove their subsidies.

Good question, but realistically, it’s unlikely that their government will reduce or remove their subsidies until it starts really hurting them. At which point, even if the domestic industry picks up again, they would be unlikely to increase their subsidies, or at least, by not as much. So the result would be a new equilibrium of sorts. Maybe they would have a $5 subsidy so that their industry matches the local industry at a $15 price.

Of course, I suppose we should never underestimate political stupidity.

3

First, Your example has only 1 item where the only way to compete is by price. Outside of gold, oil, copper, etc most other items come in a wide variety of styles and conditions with varying support contracts and the like. So consumers normally have lots of choices instead of just 2. But even with 2 choices:

There is no reason to combat a subsidity on a good by a foreign government. It is always better for local consumers to have foreign governments steal money from someone else and give it to them. If you need to understand this then assume it is a 100% subsidity, a gift, then consumers are better off taking the gift and buying something else.

As for the ending of a subsidy, you answered that question yourself. Entrepeneurs will enter the market once the subsidy is removed. I will take this one step further and say that competitors can eliminate other competitors through predatory pricing and do so all the time. It is considerably more difficult to eliminate competition. History is riddled with examples of predatory pricing schemes yielding to new competitors. The ultimate one is Standard Oil that had 98% of the oil market in 1890. At the time the Government “stepped in on the side of consumers” and broke up the “monopoly”, entrepeneurs had managed to take back 38% of the market. The other example is Microsoft that has consistently reduced the prices and increased the capabilities of operating system, web browsing and office software. There are now FREE products competiting with Microsoft in a wide variety of areas.

As for government policy: The best government policy is NO GOVERNMENT POLICY!!! It is the bitching of the losers that gets government involved. Of course they do this in the name of consumers but end up hurting consumers in the end as their actions restrict the choices of consumers.

4

In Hazlitt’s book Economics in One Lesson, one example is used to keep the explanation short and simple. He purposefully avoids things like colors, styles, sizes, etc., and uses one commodity (in the case of the book, I believe it was wool sweaters). One could argue that the slight differences of cost due style, color, or size of the imported sweater would be near-parallel to the slight differences in cost due to the same factors of the domestically-produced sweater. So, one way or another, the imported sweater is made by a firm that has an economic advantage over the domestic sweater producer. Why should the government subsidize the domestic producer, which effectively robs the consumer of purchasing power? Subsidies are paid through taxation, so the consumer now pays a higher price for the imported sweater AND has money removed from their paycheck to subsidize an a commodity that is in fact inferior.

The subsidy is not being made by a foreign government on their exported commodity; instead, it is being made by the domestic government on the imported commodity in favor of an inefficient domestic producer of an inferior commodity. The money is being stolen from the domestic population not by the foreign government, but by their own government.

Ona side note, the foreign govenment will only respond in kind to aid it’s domestic production, the rational-logical response to economic warfare. So now consumers in both the foreign AND the domestic country are hurt through the subsidizing of the original, domestic sweater producer.

The anti-trust laws had the original intention of safe guarding the consumer. Another example, to add to the two you have offered, would be the break-up of the telecommunication giant, Bell Telephone Company. But, breaking up a monopoly where consumers are subject to the whims of one all-powerful corporation, and the application of a subsidy on the inferior commodity of a domestic company are different. Again, the former has the intention of protecting the consumer, though it may warp into something damaging at times. The latter is intended to protect a producer (good intention), but instead damages the consumers (bad outcome).

I can agree only so far with you on this. I believe that the governments role is to protect the people. Not only from threats of an aggressive invader, but also from domestic threats, which I believe are those which threaten the well-being (life, liberty, and property) of the consumer-citizen in order to increase personal gain.