If rent-seeking occurs, then a countrys welfare losses from quotas will:
Over the last several years, there’s been an ongoing and lively debate in the comment section of CD between the advocates of free trade and the advocates of protectionism (“scarcityists” as Jon Murphy calls them). Some of those debates have focused on the size of the deadweight losses and welfare effects from tariffs, the possible differences in welfare effects between a small country tariff and large country tariff, the cost to the economy per job saved by
a tariff, whether there are any tariffs that increase domestic jobs and output on net, whether trade deficits have negative effects on the economy or output growth, the “legal plunder” aspect of protectionism, etc. – those are just some of the topics that have been debated recently. But there’s one topic that hasn’t yet been discussed, and that’s the significant costs imposed on the economy from the wasteful “rent-seeking” (lobbying) that takes place on behalf of domestic industries seeking
protection from foreign competition via protectionist trade policies. As Gordon Tullock wrote in 1967 in what is considered to be the seminal research article on rent-seeking (“The Welfare Costs of Tariffs, Monopolies, and Theft” ) “The welfare triangle method of measurement ignores this important cost [rent-seeking], and hence greatly understates the welfare loss of monopoly [and tariffs].” Here’s just one
example. The US has a long history of trade protectionism for American sugar producers in the form of tariffs and import restrictions on low-cost foreign-produced sugar that raises US sugar prices to about two times the world price. Currently, the world price of sugar quoted for futures contracts is less than 15 cents per pound compared to the domestic price of more than 25 cents. But when you’re an ongoing enterprise that continually engages in “legal plunder” from the American consumer to the
tune of billions of dollars per year you have to devote significant resources to protecting your coveted position of being insulated from competition from more efficient foreign rivals. What American industry wouldn’t want to be in a position to charge twice the world price for their product! Because sugar policies are subject to being challenged politically, mostly unsuccessfully, the sugar producers support a full-time rent-seeking trade organization called the
American Sugar Alliance, here’s its mission:
Of course, what is “reasonably priced sugar” to the sugar producers is actually very “unreasonably priced sugar” to the American consumers, who have paid twice the world price for as long as the USDA has been tracking world and domestic sugar prices (see data here back to 1980). And to maintain those artificially high prices, the American Sugar Alliance employs a staff of at least five full-time employees at an office in Arlington, Virginia. In addition to the costs of running the American Sugar Alliance, there are probably other lobbyists who engage in rent-seeking activities to maintain the protection granted to US sugar producers by government trade policies. Therefore, a full accounting of the cost of trade protection for Big Sugar would have to include the millions of dollars in wasteful rent-seeking, in addition to the billions of dollars of costs imposed annually on US consumers through higher sugar prices. And as Gordon Tullock points out, those significant costs of wasteful rent-seeking won’t show up in a standard analysis of tariffs that attempts to quantify the deadweight losses and welfare effects of trade protectionism. The discussion above was inspired by Don Boudreaux’s comments on Cafe Hayek a few days ago:
And there are also additional rent-seeking costs that have to be accounted for when determining the full cost of protectionism: a) the rent-seeking activities by domestic buyers of foreign inputs like sugar-using industries who will seek to challenge protected domestic producers like sugar beet farmers and b) the “contagion effect” where successful rent-seeking outcomes for one domestic industry like sugar producers will inspire other domestic industries to pursue protectionism through government policies. Here’s Gordon Tullock on those two points:
Bottom Line: When defending or supporting tariffs and other protectionist trade policies, the “scarcityists” therefore have to include the wasteful rent-seeking activities that lead to protectionism as a significant cost of the special privileges enjoyed by domestic producers through government policies favorable to those producers but very unfavorable to consumers. Even if the deadweight costs of a tariff according to standard economic analysis are negligible, or even if a large country or small country tariff could be shown to have positive effects under some unrealistic or convoluted assumptions, the rent-seeking costs would be large, significant and ongoing and would therefore most likely result in net welfare losses for society. So the challenge for protectionists is to demonstrate that there could be any tariff or protectionist trade policy that would provide net benefits for a country, once we account for all of the costs imposed on consumers and all of the costs incurred in wasteful rent-seeking. Related: See CD post “25 reasons why protectionism is taken seriously when it’s actually a form of economic suicide.“ What are the effects of quotas?Quotas will reduce imports, and help domestic suppliers. However, they will lead to higher prices for consumers, a decline in economic welfare and could lead to retaliation with other countries placing tariffs on our exports.
What are the negative effects of quotas?Reduced employee engagement.
Perceptions of unfairness can trigger unintended negative consequences. Employers who impose quotas may become less attractive to male job applicants. Quotas may also lead to low engagement and negative job attitudes among male employees.
Who benefits from quota rents?1. If the government gives away the quota rights, then the quota rents accrue to whoever receives these rights. Typically, they would be given to someone in the importing economy, which means that the benefits would remain in the domestic economy.
What happens when the government imposes a quota?A policy to reduce quantity is called a quota, a government-imposed restriction on the number of goods bought and sold. If the government sets a quota of 2 million barrels, both consumers and producers have to reduce consumption and production to that level.
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