Tag Archives: farm subsidies

Pigovian taxes on cows

Economics, , ,

As suggested by the EPA:

On a serious note, in the story, the farmer featured complained about how such a tax would hurt him financially. While that may be true, it should be irrelevant. If there is truly an externality here and it can be effectively measured and properly implemented, then there should be a tax on cows in the amount that is equivalent to the negative harm done per cow. That’s all that matters. It all hinges on the extent to which cows cause global warming and the extent to which global warming harms society.

I don’t know what kind of market cows are, but I would imagine it’s probably close to perfect competition suggesting that the tax would likely be borne by him, the producer rather than us, the consumers. They’re talking about $175/cow/year tax. On the other hand, this farm received $561,695 in federal subsidies from 1996-2006.

A good first step would be getting rid of these subsidies entirely, which would let the market correct itself inasmuch as it can before trying to internalize these negative externalities. It would make more sense to remove the existing distortion, see what happens in the market, and then layer on the Pigovian tax.

Let the number of cows produced decrease in a two-step process, rather than shocking the market all at once which would probably unfairly tarnish the idea of a Pigovian tax as a policy tool. (“Look what happened to the price of beef and dairy when we…!” etc.)

Via Greg Mankiw.

Obama and farm subsidies

Economics, Politics

From Greg Mankiw:

Like President-elect Obama (but unlike candidate Obama), I am all for getting rid of farm subsidies. But why would you want to use taxpayer funds to encourage large, efficient, profitable farms to break up into smaller, less efficient, less profitable farms? Isn’t that precisely what you do if you maintain subsidies only for small farmers?

I’ve thought about this, too. A lot. The answer is pure politics wrapped in an age-old economic battle: equity vs efficiency. Doing what’s efficient vs doing what’s “fair”. (Fairness being a subjectively ambiguous term.)

I’m all for getting rid of farm subsidies to everyone and letting the market sort out who wins and who loses. This places smaller farmers a distinct disadvantage because an industry like wheat farming is the almost-perfect definition of perfect competition. Neither side has market power. The only way for a farmer to increase their income is by producing more wheat. As the big guys are bigger, they have economies of scale, especially in terms of capital investment on their side. In a price-taking market, this advantage is the only business advantage possible.

Subsidizing the little guys makes them more competitive with the big guys, but this is a distortion of market efficiency. Sometimes this makes sense, but not in the case of farming in the US: we produce more food than we could ever consumer, so why are we subsidizing anyone? (Food shortages are not a production problem, they are political and logistics problems.) Subsidizing smaller producers can be done to encourage competition, but we’re already in a perfectly competitive market, so distorting the market in some way is entirely counterproductive.

Alas it is politically unacceptable to make a move that favors the big guy over the little guy. Even though doing so would ultimately better for society. Let us not fall victim to the broken window fallacy that we’re keeping smaller farmers in jobs by subsidizing them. We could just as easily be spending that money more efficiently by putting other people to work in areas that actually make sense: infrastructure repair and long-term capital investments in green energy technology, for example. We need these two things more than we need greater quantities of domestic farm products.