Recently in class we have been discussing how subsidies are often seen to be very beneficial to the trade of a country, but that is not necessarily the case. We have learned that subsidies can flood the world market of a certain good, thus hurting the country involved even more than a tariff would. I looked for an article discussing the negative effects of a subsidy on a certain commodity or resource, and found the following article on fuel subsidies.
http://oilprice.com/Energy/Gas-Prices/Why-Fuel-Subsidies-are-Bad-for-Everyone.html
This article delves into the specific ways that people within the country that is receiving the subsidy are hurt. First it discusses the ramifications that the subsidy will have on the poor. The article explains that there are both good and bad things that come from subsidies. The obvious bright side to a subsidy, is that it makes the good cheaper to the importing country. The problem is, that in most countries, the poor account for a very small percentage of fuel consumption. It is the rich people within the country that are reaping the benefits of the discounted price of fuel. The government is using their budget on subsidized fuel which could be used in other ways to directly help the poor. They do not experience very much benefit from this, and are hurt by lack of government attention to other direct needs.
On the other hand, the rich are hurting from these subsidies as well through taxes. It is the rich within the country that are eating these consumption taxes that are proven to rise along with the subsidies. The progressive nature of the tax tends to out-weigh the regressing price of fuel that comes with the subsidy. The author also makes the argument that subsidies can hinder economic growth by changing a countries' structure of trade. A country will often begin to export goods or resources that have higher opportunity costs rather than in places where they have a competitive advantage. This will in the end, hurt the countries' terms of trade.
My response to this article was that I agree with a lot of the points that are being presented mainly due to the discussions that we have had in class. I have never previously viewed subsidies to be an issue, but seeing how they can hurt everyone within a country with minimal benefits, it makes you wonder why they are put in place at all.
I agree with Drew that export subsidies cause more harm than help. Before discussing the effects of subsidies and tariffs, I always viewed subsidies as good and tariffs as bad. This is not the case, even with a highly used good like oil. I just assumed that the decrease in prices would benefit the poorer citizens most by allowing them to spend more income on other products, but in fact they are hurt. I think that this could be avoided if the government were to restructure their budget to keep the same amount of public aid to the poor, possibly by lowering the size of the subsidy. Also, I wonder why the government would even create a subsidy in the first place if it hurts citizen welfare, lowers the terms of trade, and strains the government budget. If anything, it would make sense to impose a tariff to generate more government revenue and higher terms of trade because there is going to be a dead weight loss either way.
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ReplyDeleteFrom what we have learned, no doubt that free trade is the best condition out of all, which is also very hard to achieve. Subsidy or tariff or other trade restrict policy hurt the welfare of the countries somehow, but it is important for countries to impose these trade policies. The market is not as perfect as the economists assume it to be, countries need these policies to protect themselves or they will lose more.
ReplyDeleteI never realize that subsidies could do so much damage to an economy. Previous to learning the real effects of a tariff and subsidy I have had the same view as John believing subsidies to be a good thing and tariffs to be bad. Which leads me to the question. Why does the government issue subsidies if they have such a negative impact?
ReplyDeleteI also believed subsidies were a better alternative to tariffs. It never occurred to me to question where the tax breaks on producers might be coming from. From Drew's article it's quite easy to see how politicians could play their hand when trying to win over votes. The party pushing for subsidies and promising to make goods cheaper for consumers could easily win over a good amount of people by using this argument. You would imagine a person running for election would have enough knowledge and morality to know that imposing such policies do nothing but hurt the consumers.
ReplyDeleteI think a distinction that needs to be made is that there are not only "Rich and Poor" consumers. There's most likely the presence of a middle class in the importing economy. Regardless, this article hits the nail on the head about why subsidies are not optimal. However the issue of oil gets a little sticky... Lower prices of things such as oil in the United States is almost never a bad thing though, as everyone in the nation, even the poorest citizens, pay for oil (gas) price changes in some way. Whether they drive a car or not, transportation costs are affected by oil prices, and almost all consumer goods in the economy are transported with almost no exceptions. Abroad, however, is a different story. In a nation with a high income-inequality, the poorer members might not drive nor have goods transported to them.
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