Arnold Kling

Oil Import Tariff?

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IRA's to the Rescue?... Quack Remedy...

Charles Krauthammer's premise, that reducing demand for oil will reduce terrorism, violates what I call Oil Econ 101. But he does offer the least costly way to achieve the goal.


Slap, say, a $5 (or $10--the bazaar is open) tax on every imported barrel. And most important, keep the new price--let's say $35--as a floor.

For Discussion. Is it fair to say that a tax is both the most economically reasonable and the most politically unthinkable approach to energy conservation?


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COMMENTS (32 to date)
Eric Krieg writes:

I have a little experience with high gas prices, as gas hit $2.50 a gallon in Chicago in the summer of 2000. Anecdotally, I found that it did get poor people off the roads. They could no longer afford to drive, and traffic eased somewhat.

But it didn't do a damn thing to me. This SUV driver didn't change his behavior at all. It simply wasn't enough money to make any impact to me whatsoever.

My point is that, if you really want to change people's behavior, you have to set the tarrif at the point where gas gets REALLY expensive. What would it take to get it to $3 per gallon? $4?

Even at $3 per gallon, what is that in 1980 dollars? Gas was still probably more expensive back then. And we're a lot richer now than we were then.

JT writes:

In answer to Arnold's question, it is the most politically unthinkable in that a broad cross-section of the voting public is exposed to a transparent tax. Regulatory efforts such as these typically would attempt to disguise the cost and blame a large entity for the problem instead of consumers themselves.

David Thomson writes:

I have long argued that we should guilt trip people who unnecessarily drive SUVs and other large vehicles. Often they are not practical means of transportation, but purchased to impress the next door neighbors. Gosh darn it, where’s Thornstein Veblen when you need him?

Our “mainstream” Democrats have indeed done much to damage America by their foolish advocacy of radical environmentalism. Heck, just take a look at what they did to California. But should we tax our energy usage? Absolutely not! We don’t want to provide politicians with more money to waste. A tax enacted today is likely to remain with us forever. Legitimate guilt tripping is the way to go. Why drag in the political sector when much of the problem can be resolved by private means?

David Thomson writes:

I should quickly add that I find it morally reprehensible that anyone purchases a Hummer. There simply no justification for this vehicle while our soldiers are dying in the Middle East. The owner of a Hummer is a despicable and selfish individual who deserves our moral condemnation.

Some people with large families and other responsibilities might be able to justify driving a SUV. But nobody can rationally defend the purchase of a Hummer.

Eric Krieg writes:

David, you're going to love me. I'm the worst kind of SUV driver: a black SUV driver. We black SUV drivers think that we're Darth Vader, and thus drive extra-aggressively.

Seriously, I find it a joke that you think you could guilt anyone into doing anything in this culture. We have taken the 10 Commandments and thrown them out, to be replace by one: Thou shalt not judge.

I like SUVs. They're fun to drive, they're roomy, they're safe. I used be an enthusiastic small car driver, but they simply don't work when you have kids. SUVs are great for kids.

SUVs' only fault is that they just happen to get bad gas mileage. But if everybody like me traded in our Blazers for Civics, it would be a small dent in oil consumption.

David Thomson writes:

“Seriously, I find it a joke that you think you could guilt anyone into doing anything in this culture. We have taken the 10 Commandments and thrown them out, to be replace by one: Thou shalt not judge.”

Our hesitation to “judge”others has gone a bit too far. We have inadvertently become moral relativists who are afraid to say that some actions are morally indefensible. For instance, the ACLU is currently defending NAMBLA---an organization devoted to child molesting. This nonsense has got to cease. There are some actions and behaviors that are beyond the pale.

Please note that I conceded that there are legitimate reasons for some people to own SUVs. Still, there are no moral justification whatsoever in driving a Hummer in the city while our soldiers are laying down their lives in defense of our nation. I have long held the Ayn Rand crowd in contempt. These folks are arrogant selfish idiots who have caused enormous harm to our culture.

Bernard Yomtov writes:

While I understand your fundamental point about oil being a commodity, it still seems to me that reducing demand for it might reduce terrorism.

If we reduce demand we reduce both the price of oil and the quantity sold. At least that's what it says here in Chapter 1. So the producers' revenue, including the Saudis' revenue, falls.

Depending on the "consumption" preferences of the Saudis, this will likely reduce their spending on terrorism somewhat (Chapter 2).

Eric Krieg writes:

Has anyone really done the math on this? The fleet average fuel economy has dropped a couple of mpg in the last few years. How much oil would be saved if, say, the fleet average fuel economy of the US increased by 2 mpg? I speculate that it ain't that much.

Getting rid of SUVs is not the answer, because MPG is but one variable. Another is average miles driven, which has also been increasing lately. I believe that a big increase in the cost of gasoline would lower miles driven, which in turn would lead to less consumption much more quickly than simply increaseing the average MPG.

Of course, once again, as the New York Times always reminds us, women and minorities would be the ones most effected (the poor, really).

Bruce Bartlett writes:

The real fallacy of Krauthammer's proposal is that it would produce windfall profits for domestic oil producers. Liberals will never allow this to happen.

Bernard Yomtov writes:

The real fallacy is that he calls for checks to be issued to poor people to compensate them for higher fuel costs. Conservatives will never allow this to happen.

The windfall profits for oil companies that Bartlett so longs for would come not as a result of their enterprise or capitalist daring, but would be a predictable byproduct of government policy. It is essentially a regressive tax on the general public, with proceeds paid to oil companies. I can't wait to hear the spin on that one.

Dominique writes:

"I have long argued that we should guilt trip people who unnecessarily drive SUVs and other large vehicles. Often they are not practical means of transportation, but purchased to impress the next door neighbors. Gosh darn it, where’s Thornstein Veblen when you need him? "

Where do you stop in judging other people's action or second guessing the intention /real reason behind people s decision?

I would love to spend a day in your house and rummage through your belongings to tell what you may or may not own, based on erronous decisions on your part, erronous from my point of view of course. Don t worry i will tell you how to behave next time and the reasons given will all have the appearance of rationality. For example, some of your stuff will be deemed "impractical for the use intended". Voilà, and that s that ?

Then I will go through your choice of words and tell you what you may or may not choose to say depending on whether you want to impress others.

What s that ? You say I am restraining your freedom ? Just as you dislike SUV, I will find belongings of yours that do not fit my view of society and I will give you good reasons. You will not find these reasons good but I will, and in the end that is all that matters, n'est-ce pas? If you find SUVs impractical while others explicitly say they do not, and yet this does not stop you from holding the idea, why should I stop at the idea of reeducating you as I see fit even though you disagree with what I am about to do to you?

Morality depends largely on how you define it no? NAMBLA people think themselves probably very moral from their point of view. (I absolutely do NOT side with these people).

First abolish SUVs. Then what ? What are the limits to this line of reasoning? Flush toilets? That extra sandwich in the packed meal which one will never eat? What is the Waste Police going to do about it ?The truth is there are no limits. There will always be someone to think something owned by a third party is a impractical etc...Try envy as the real reason... Let me come to your home : I will show you how my persuasive friends of the Sandwich Waste Police and I can get you to "cooperate" with us. I dare you.

It s a slippery slope that you are following Sir.

David Thomson writes:

“It s a slippery slope that you are following Sir.”

The very premise of democracy (and I am dead serious) is considered a slippery slope by radical libertarians. “Gosh, today they are putting up a stop sign at the corner. Will they forbid us from driving our cars on the highways tomorrow?” Once again, I said nothing about banning SUVs---or even Hummers. I did, though, say that Hummer owners should be deeply ashamed of themselves while our soldiers are dying in the Mid East. Anyone who owns a large vehicle has a moral obligation to ask themselves whether they actually need it. I consider anyone driving a Hummer on a regular city street as a morally selfish person deserving our contempt. You might be able to justify a SUV, but the same cannot be said of the Hummer.

“Morality depends largely on how you define it no? NAMBLA people think themselves probably very moral from their point of view. (I absolutely do NOT side with these people). “

Your moral relativism has unwittingly deteriorated into pure nihilism. The Nazis also “think themselves probably very moral from their point of view.” Am I hitting you with a cheap shot? Not in the least! You simply have not taken your views to their logical conclusion.

“Where do you stop in judging other people's action or second guessing the intention /real reason behind people s decision?”

Welcome to the real world. We judge people whether we care to admit it, or not. There is a consensus opinion regarding murderers and rapists, but I candidly concede that eventually the matter becomes rather murky. Alas, this conundrum is inevitable and cannot be ignored.

Jim Glass writes:

"If we reduce demand we reduce both the price of oil and the quantity sold. At least that's what it says here in Chapter 1. So the producers' revenue, including the Saudis' revenue, falls."

If we artificially reduce demand for oil by government fiat, Chapter 1 level analysis indicates its price will fall, the higher-cost suppliers will leave the field, and production will become more concentrated among today's lowest cost suppliers, who are the Arab states in general and Saudis in particular. I'm not sure concentration production among the Arabs should be our objective.

(The Saudi production cost is something around $5/b and they can produce as much as they want to get as much money as they want if they are willing to screw over all the other producers in the process. That's how they control OPEC.)

OTOH the market has been doing a fine job, gradually over time, of reducing oil's role in the whole energy picture, reducing the reliance on middle eastern oil for total energy needs, reducing the real price of oil to pre-1973 levels -- and reducing per-capita GDP in Saudi Arabia steadily since 1973. It's now down something like 50%.

So if making the Saudi's poorer was going to reduce terrorism I think we'd already have seen that effect. More likely it's the reverse, doing so has increased terrorism by increasing the strains within Saudi society.

But if we really *did* want to make the Saudis poorer, the effective way to do it would be to put a tariff on their oil while boosting alternate sources of production -- not by making Americans poorer by increasing the cost of their energy and making them drive cars they deem inferior.

Bernard Yomtov writes:

Jim,

You are correct abotu the consequences of a reduction in oil demand. But the consequences you describe apply whether the reduction is caused by government fiat, the availability of alternatives, economic slowdown, or anything else. Even so, Saudi revenues will drop, because of the lower price, and despite the concentration the Saudis' actual total volume sales will drop, depressing their revenues further.

What you and Krauthammer propose is a tariff on IMPORTED oil. This is not unlike a subsidy for domestic producers, from their point of view, so domestic production will increase, and the oil companies will enjoy a massive windfall at the expense of drivers.

Does reducing Saudi revenue decrease terrorism? To the extent it reduces funds available it reduces the demand for terrorists. But if, as you argue, this also increases the number of potential terrorists, then the supply of terrorists goes up, so the net effect on quantity is indeterminate.

Jim Glass writes:

"... the consequences you describe apply whether the reduction is caused by government fiat ..."

If the drop results from market forces, as has been happening, the result is the same for the Saudis but the result to US consumers is optimal. OTOH if the drop comes by gov't fiat the result is a tax on consumers -- be it caused by an actual tax on consumption of oil, or by gov't regulations on things like auto mileage which compel consumers to buy at greater cost what they would otherwise deem inferior products.

Moreover, there's a difference between the tax and the regulations in that the tax is is much more efficient so it costs consumers less, and also is transparent compared to the opaque effects of regulation, so it is more honest politically.

(Remember that the CAFE mileage requirements were imposed only after voters make it clear that they *didn't* want a tax imposed on oil to reduce consumption of it, so that political effort died in Congrees. The CAFE rules were then imposed as a means of accomplishing the same thing much more slowly and at much greater cost to consumers, under the guise of compelling the car companies to make "better" cars. Who's against the car companies being forced to make "better" cars? Nobody, of course. But if consumers really thought such cars were better, they'd demand them on their own. So why would the car companies have to be forced to make them?)

"What you and Krauthammer propose is a tariff on IMPORTED oil. This is not unlike a subsidy for domestic producers..."

Of course, but there's no free lunch if you want to intervene in the market to reduce oil payments to the Saudis. Only the market provides this result "free", at a gradual rate. If you want to intervene to get the result faster you have to look at the menu of options and pick the most cost-effective one.

E.g., You could embargo Saudi oil to get the same result (if you can find a way around the fungibility problem) and raise domestic oil prices by the same amount -- but that would be even better for domestic producers, because the amount of the tariff would go to them rather than the gov't. Or you could tax all oil -- but that's overkill on consumers and would harm alternative producers that we'd rather see grow. Or you could impose CAFE requirements for slowest possible results, to see regulations get gamed with the likes of the creation of the SUV, also see thousands of extra drivers get killed by being pushed into lighter less-safe cars than they'd otherwise buy, and so on.

Of the options, a tariff is fastest working, most targeted, least costly and most efficient.

And besides, who says that a subsisdy for domestic producers is a bad thing *if* you are going to intervene in the market to eliminate major foreign supplies? It mitigates harm to consumers by reducing the shrinkage of supply to them. The tariff amounts collected could even be used for specific supply-enhancing projects, like underwriting new exploration or more efficient extraction technologies. This would keep consumers closer to what would have been their optimal free market situation.

David Thomson writes:

“Or you could impose CAFE requirements for slowest possible results, to see regulations get gamed with the likes of the creation of the SUV, also see thousands of extra drivers get killed by being pushed into lighter less-safe cars than they'd otherwise buy, and so on. “

Americans should not drive onlyVolkswagons! I readily concede that smaller vehicles are more dangerous to drive. But a Hummer? I think you are pushing your argument a bit too much. We can find a rational balance and not go from one extreme to the other.

Both Democrats and Republicans are greatly responsible for our current energy troubles. The Donkey Party listens too much to the environmental extremists---and the latter is too influence by the childish writings of Ayn Rand and other radical Libertarians. There is something morally corrupt when the auto industry, during war time, is focussing on developing automobiles with more horsepower instead of better gas milage.

Jim Glass writes:

"There is something morally corrupt when the auto industry, during war time, is focussing on developing automobiles with more horsepower instead of better gas milage."

The auto industry strives to produce what consumers want -- so what you really are saying here is that there is something morally corrupt about consumers wanting what they want.

Let's locate the moral failing where it really is.

OK, so who do you think is so morally superior to consumers as to be entitled to dictate to them what they should want? I suggest you nominate me! ;-) Otherwise you are going to have to settle for a bunch of scurvy log-rolling politicians who can't even do the simple, efficient, honest thing by enacting a tariff or import quotas on middle-eastern oil to reduce dependency on it straightforwardly, and then letting consumers choose what they want afterward.

Mcwop writes:

David,
You make some good points. I might add this real life story that I am experiencing now. I have a Subaru Forrester (not quite a hulking SUV) Mileage is better than many large SUV's, but not as good as a Mini Cooper (the car I would like to switch to). Fuel effeciency is an important factor in my decision. However, the sales tax is holding me back. Coming up with the cash, well, stinks. By my calculations the savings in fuel costs will take 6 years to recoup the sales tax I pay now (assumes no increase in gas prices).

To the discussion point: if there were a sales tax break for people moving to a more fuel effecient car than they own, then this tax policy seems economically reasonable.

Bernard Yomtov writes:

"And besides, who says that a subsisdy for domestic producers is a bad thing *if* you are going to intervene in the market to eliminate major foreign supplies?"

I don't recall advocating such intervention

"It mitigates harm to consumers by reducing the shrinkage of supply to them."

How does it do that? I think you're double counting here. It's the tariff itself that generates the subsidy by allowing domestic oil companies to raise their prices, i.e., shift their supply curves back.


"The tariff amounts collected could even be used for specific supply-enhancing projects, like underwriting new exploration or more efficient extraction technologies. "

If there are profitable investments of this sort to be made surely the oil companies don't need even more help to make them. Just the higher price generated by the tariff should suffice.

"This would keep consumers closer to what would have been their optimal free market situation."

Horsefeathers. This will not lower the price at all. Why should it?

Tom writes:

So, Dave, you probably would not be thrilled to see what our friends call and "SV" (it's not an "SUV" because it has no utility), aka the Stretch Limo Hummer.

Here in Southern California I've seen several.

Jim Glass writes:

It these blog comments I'm sometimes not sure that people are talking about the same thing, so I'll try to make clear what I mean and if we're not then apologies in advance...

"'It mitigates harm to consumers by reducing the shrinkage of supply to them.'"

"How does it do that? I think you're double counting here. It's the tariff itself that generates the subsidy..."

A tariff on a foreign good increases its cost and thus reduces imports of it and its supply domestically. The reduced supply increases its price to consumers and benefits domestic producers who get the increased price.

If we were being precise I wouldn't call a tariff a "subsidy". It certainly helps domestic producers but at the cost of consumers. A true subsidy paid to producers would come from the gov't (or some other outside source) and not increase costs paid by consumers. To the contrary, it would have the intention of reducing costs paid by consumers.

E.g. Jimmy Carter's subsidies for oil-from-coal and the like during the oil crisis of the '70s. The idea was to spur domestic production to above what would otherwise be the market level to mitigate the cost to consumers of a supply interruption. (Ill-conceived as the idea turned out to be.)

" 'The tariff amounts collected could even be used for specific supply-enhancing projects...' "

"If there are profitable investments of this sort to be made surely the oil companies don't need even more help to make them. Just the higher price generated by the tariff should suffice."

But not to the point that the original price to consumers is restored, clearly, or the tariff wouldn't increase the domestic price. The higher price resulting from the tariff enables domestic producers to increase supply by bringing online higher-cost production than they could previously, which requires consumers to pay a higher price than previously. So consumers are harmed by the tariff. I mean, if starting today we imposed a $20/b tariff on imported oil you wouldn't expect the domestic price of oil to remain unchanged, would you?

" ' This would keep consumers closer to what would have been their optimal free market situation.' "

"Horsefeathers. This will not lower the price at all. Why should it?"

The tariff increases costs to consumers by reducing total supply at the new equilibrium. If one wants to get consumers back to paying their previous price so they are not harmed, then supply must be increased further. But further expansion of supply would cause producers to lose money since their marginal costs would go up while prices go down. So the gov't pays them a subsidy sufficient to cover this loss and give them a little reward too, giving them an incentive to engage in the increase in production.

In principle. I'm not saying it would work well in practice, it didn't work for Jimmy Carter. In practice a tariff is just going to help producers at the cost of consumers. So one had better be sure one is imposing it for a good enough larger cause.

Bernard Yomtov writes:

"A tariff on a foreign good increases its cost and thus reduces imports of it "

Yes.

"and [reduces] its supply domestically."

Sort of. The domestic supply curve need not shift. The quantity supplied by domestic producers increases, because they can now sell oil that costs up to $35 (for example) to produce. But yes, the total supply curve (import plus domestic) rises (shifts back - supply drops). The price rises accordingly.

"The reduced supply increases its price to consumers and benefits domestic producers who get the increased price."

Yes. As long as you mean total supply. Domestic producers get the same higher price as importers, but have no tariff to pay. Hence they receive a windfall. Another way to see this is to realize that even if the domestic supply does not shift, domestic producers sell more, at a higher price, than before.

"If we were being precise I wouldn't call a tariff a "subsidy". It certainly helps domestic producers but at the cost of consumers. A true subsidy paid to producers would come from the gov't (or some other outside source) and not increase costs paid by consumers. To the contrary, it would have the intention of reducing costs paid by consumers."

What I wrote was that it is "not unlike a subsidy." And it is not. Your notion ignores the fact that the government subsidy comes from taxpayers, who are also consumers. So even though the price at the pump may be less, the total cost will still be greater. Suppose gas costs $2.00/gallon and the govt, in an effort to lower the price to consumers, gives the oil companies a subsidy of $.50 per gallon sold. The price will drop, but not all the way to $1.50. So consumers will pay, say $1.75 for gas, plus an extra $.50 as taxpayers.

In any case, it is clear that what happens with the tariff is that the government takes an action which transfers wealth from consumers, or the public if you prefer, to oil companies.

"But not to the point that the original price to consumers is restored, clearly, or the tariff wouldn't increase the domestic price. The higher price resulting from the tariff enables domestic producers to increase supply by bringing online higher-cost production than they could previously, which requires consumers to pay a higher price than previously. So consumers are harmed by the tariff. I mean, if starting today we imposed a $20/b tariff on imported oil you wouldn't expect the domestic price of oil to remain unchanged, would you?"

Of course I wouldn't. That's my whole point. But unless R&D can shift the DOMESTIC supply curve out enough that it intersects demand BELOW the price (with tariff) of imported oil then the market price will not fall below that price. This is very unlikely in itself, and an even greater shift is needed to restore the original price.

"The tariff increases costs to consumers by reducing total supply at the new equilibrium."

The tariff increases costs by shifting the total supply curve to the left.

"If one wants to get consumers back to paying their previous price so they are not harmed, then supply must be increased further. But further expansion of supply would cause producers to lose money since their marginal costs would go up while prices go down. So the gov't pays them a subsidy sufficient to cover this loss and give them a little reward too, giving them an incentive to engage in the increase in production."

This sounds self-defeating to me. The govt subsidizes the production of oil that costs more than, say $20/bbl to produce, by the amount needed to bring the cost down to $20, thereby reducing the consumer price to $20. Is that what you have in mind? But then we're consuming like it costs $20 when it really costs more, maybe a lot more. I didn't think prices were supposed to work that way.

Jim Glass writes:

"What I wrote was that it is "not unlike a subsidy." And it is not."

A subsidy is a transfer payment into a market intended to increase transactions by increasing demand or supply *without* imposing a corresponding cost on the other side within the market. That's quite different from a legal intervention in the market, like a tariff or a quota, that shifts the terms of trade in favor of one side at the other's expense.

E.g. housing vouchers given to tenants are a subsidy that increases the demand for housing and so can pull out more supply by market demand. Total supply increases. Rent control is an intervention in the market that shifts terms in favor or tenants, which may increase demand, but which also reduces return to landlords, so total supply decreases. Rent control is not a subsidy for tenants like vouchers are. Big functional difference.

Similarly, say the domestic oil industry is producing oil that has up to $25/b marginal cost. You want to get it to produce oil that has up to a $30/b marginal cost. You can do it by providing a subsidy that covers the cost. Oil production then increases and market prices go down for consumers. They are better off. Or you can do it by eliminating external supplies to increase the market price to consumers to cover the $30/b cost. Supply goes down and price goes up and consumers are worse off. To me that seems a pretty big difference for "not unlike".

"Your notion ignores the fact that the government subsidy comes from taxpayers, who are also consumers."

If I don't ignore it, it doesn't change the above. And if it meant subsidies were a wash the politicians wouldn't hand out so many of them.

"In any case, it is clear that what happens with the tariff is that the government takes an action which transfers wealth from consumers, or the public if you prefer, to oil companies."

Agreed. That's the point. And this transfer is why the government had better be sure that the purpose of the tariff is worth it.

"... unless R&D can shift the DOMESTIC supply curve out enough that it intersects demand BELOW the price (with tariff) of imported oil then the market price will not fall below that price. This is very unlikely in itself, and an even greater shift is needed to restore the original price."

It's extremely, extremely unlikely, as if we could do that we'd be beating the Saudis on production cost and be exporting oil to them. They'd be imposing tariffs to protect their producers from ours! A tariff is never going to *lower* domestic prices this way, obviously.

"This sounds self-defeating to me. The govt subsidizes the production of oil that costs more than, say $20/bbl to produce, by the amount needed to bring the cost down to $20, thereby reducing the consumer price to $20.... But then we're consuming like it costs $20 when it really costs more, maybe a lot more. I didn't think prices were supposed to work that way."

Yes it would be very expensive, and I said it wouldn't work in practice for oil.

OTOH, that's what subsidies do, and governments do hand out a lot of them.

David Thomson writes:

"The auto industry strives to produce what consumers want -- so what you really are saying here is that there is something morally corrupt about consumers wanting what they want. "

I merely need to slightly rephrase the above sentence:

"The Child Pornography Industry strives to produce what consumers want--so what you really are saying here is that there is something morrally corrupt about consumers wanting what they want."

Just because somebody wishes to buy something does not make it a moral decision.

David Thomson writes:

"OK, so who do you think is so morally superior to consumers as to be entitled to dictate to them what they should want? I suggest you nominate me! ;-) Otherwise you are going to have to settle for a bunch of scurvy log-rolling politicians who can't even do the simple, efficient, honest thing by enacting a tariff or import quotas on middle-eastern oil to reduce dependency on it straightforwardly, and then letting consumers choose what they want afterward. "

I do not believe that politicians should be involved in this matter whatsoever. A consensus moral shaming is sufficient. And by the way, this is how we normally handle these sorts of situations! I'm sure that you do this all of the time just like the rest of us.

David Thomson writes:

"While I understand your fundamental point about oil being a commodity, it still seems to me that reducing demand for it might reduce terrorism. "

Alas, you are only half right. We should indeed cut back on consumption as much as it is realistically possible. However, we should also be drilling for more oil in Alaska and off our America shores. Both the Republicans and Democrats are at fault. There is plenty of blame to go around.

Bernard Yomtov writes:

"Similarly, say the domestic oil industry is producing oil that has up to $25/b marginal cost. You want to get it to produce oil that has up to a $30/b marginal cost. You can do it by providing a subsidy that covers the cost. Oil production then increases and market prices go down for consumers. "

So the price of oil is $25. By subsidizing production costs for sources that cost more than $25 all you do is flatten the supply curve at $25. That doesn't change the price. And it leads to a huge misallocation of resources.

"They are better off. "

No. The price hasn't changed, and taxes have gone up to cover the subsidy. They are worse off.


Or you can do it by eliminating external supplies to increase the market price to consumers to cover the $30/b cost. Supply goes down and price goes up and consumers are worse off. To me that seems a pretty big difference for "not unlike".

Not a big difference at all. See above.

"Your notion ignores the fact that the government subsidy comes from taxpayers, who are also consumers.

If I don't ignore it, it doesn't change the above. And if it meant subsidies were a wash the politicians wouldn't hand out so many of them. "


You seem to think that "consumers" and "taxpayers" are two entirely different groups of people, when in fact they are the same.

Politicians hand out subsidies because the beneficiaries are few relative to those who pay the cost, so the politics is perverse. We all pay a few cents extra for sugar, which we don't notice, and the producers collect huge sums, which they definitely do notice. And of course they make sure to hand over a portion to the politicians to keep the game going. But that doesn't mean it makes economic sense from a national point of view. It doesn't.


"In any case, it is clear that what happens with the tariff is that the government takes an action which transfers wealth from consumers, or the public if you prefer, to oil companies."

"Agreed."

Just like a subsidy takes money from the public and hands it over to the recipients.

"That's the point. And this transfer is why the government had better be sure that the purpose of the tariff is worth it."

Jim Glass writes:

~~
"The Child Pornography Industry strives to produce what consumers want--so what you really are saying here is that there is something morrally corrupt about consumers wanting what they want."

Just because somebody wishes to buy something does not make it a moral decision."
~~

Agreed, but you originally said the shameful thing was what producers were striving to produce.

Producers in a competitive environment will end up producing what consumers want, even if they don't like it themselves, if only by Darwinian selection. Those who don't will disappear and those who do will survive and grow. It can't be any other way. (Remember, Darwin got the idea from Smith and Malthus.)

The fault is not in our producers but in ourselves.

If you want to shame (or preferably educate) consumers into wanting something better than they do, be my guest.

Jim Glass writes:

""They are better off. "

"No. The price hasn't changed..."

A subsidy to increase production increases the amount supplied, and an increase in supply reduces the price to consumers, which makes consumers better off.

"...and taxes have gone up to cover the subsidy. They are worse off."

C'mon, the beneficiaries of a subsidy pay only a small portion of its tax cost, which makes them winners. Do you think all those folks lobbying so hard to get their new prescription drug subsidy are doing it because they aren't going to benefit from it because taxpayers are going to pay for it and they are taxpayers. ;-)

Or that farmers who get crop subsidies, and renters who get housing vouchers, don't benefit from them because the cost is paid by taxpayers and they're taxpayers? The beneficiaries of subsidies get 100% of the benefit and pay only a tiny portion of the total cost. So they come out ahead. That's what drives the politics of subsidy-seeking and why government policies are so replete with them.

Now if you want to say that in the *aggregate* all these subsidies amount to a great misallocation of resources that multiplies the cost of government as a whole to everybody's expense, you might well be right.

But that doesn't change the fact that the individual, voting recipient of a subsidy for housing, or crop growing, or oil-buying, or home mortgage interest, or whatever, is better off with it than without it.

"You seem to think that "consumers" and "taxpayers" are two entirely different groups of people, when in fact they are the same."

Look at the distribution of people who drive cars and compare it to the distribution of the burden of income tax. If a subsidy for gasoline purchases financed by income taxes was proposed for a vote, beneficiaries would outnumber losers 5-to-1. Welcome to Public Choice economics.

Tell the people who get Social Security and Medicare that they don't benefit from them because these programs are paid for entirely by taxpayers and they're the taxpayers, "the same people". See what they say.

"Just like a subsidy takes money from the public and hands it over to the recipients. "

No, a tariff is very different from a production subsidy -- one reduces supply and increases price, while the other increases supply and reduces price. One's cost is spread over the entire nation of taxpayers while the other's entire cost is concentrated upon a much smaller group of consumers in a single market. How much more different could you want them to be?

Bernard Yomtov writes:

"Now if you want to say that in the *aggregate* all these subsidies amount to a great misallocation of resources that multiplies the cost of government as a whole to everybody's expense, you might well be right. "

Might well be??!!! That's pretty grudging.

What you say about subsidies being good to beneficiaries if they constitute a small group, relative to population, is true of course. I do think of "gasoline buyers" and "taxpayers" as essentially the same large group, and was speaking in aggregate terms. While there are differences, I'm not sure they're as great as you say. And talking about how people would vote, rather than whether they really understand the consequences, is something of a red herring.

"No, a tariff is very different from a production subsidy -- one reduces supply and increases price, while the other increases supply and reduces price."

A tariff reduces the import supply. It does not reduce domestic supply. In fact it will increase the amount supplied by domestic producers.

A subsidy intended to enable domestic producers to compete with importers will not necessarily lower prices. Take a simple case where imports are simply cheaper than domestic production. Then the market price is the import price.We can subsidize domestic producers to enable them to sell at the import price, but that will still be the market price. Similarly, if the import supply curve is fairly flat it takes a lot of subsidy to get prices down.

"One's cost is spread over the entire nation of taxpayers while the other's entire cost is concentrated upon a much smaller group of consumers in a single market. How much more different could you want them to be?"

In the case of gasoline, your "smaller group of consumers" is pretty big. Didn't you say it's bigger, in fact, than the "entire nation of taxpayers?"

Of course there are differences between tariffs and subsidies, Jim. But there are similarities as well. Both are transfers which benefit some people at the expense of others, and are usually, in strict utilitarian economic terms, a bad idea.

The issue, I think we agree, is whether other effects are sufficiently beneficial to mitigate this. Is this worth fighting a war over?

Stephen Richards writes:

There are some limits to this discussion. Domestic Oil production in the US peaked in 1970 and has been declining since then. The difference between US produciton and US consumption has been made up by imports. No ammount of realistic economic insentive can increase the Domestic oil produciton in the US. The oil simply isn't there - we used about 3/4 of it already, and the last 1/4 will be slower and slower to pump out. This is why we import oil. If the price of oil was $150/barrel US oil prodcution would not double to try and meet demand - no one can sell oil that doesn't exsist.

sam weeks writes:

Do the oil companies that develope oil productions in the USA charge the same prices for their crude as the OPEC.

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