Wednesday, August 10, 2005

Farm subsidies

Okay...enough political nonsense, back to economics.

2004 Clark medalist Daron Acemoglu and Berkeley political scientist had a paper in the Sept. 2001 edition of the American Political Science Review that asks the question, "Why is income redistribution usually inefficient?"

If we want to reallocate income to some group, it's better to just give them a chunk of money instead of using something like a subsidy, which distorts prices. For example, if we want to give farmers more income we should just give them each a lump-sum transfer conditional on being a farmer before we started talking about the policy (it is important that the transfer be conditional on something that they can't control.) Yet farm subsidies and price controls, inefficient methods of redistributing income, are the only programs we have.

Acemoglu and Robinson argue that it's because farm subsidies help to perpetuate themselves, so rent-seeking farmers press for subsidies instead of efficient transfers. It's driven by the conditional nature of efficient transfers. If income is only distributed to pre-existing farmers it doesn't do anything to attract new farmers. Then the membership of the agricultural lobbying coalition is stagnant or declines. But subsidies apply to every unit of agricultural goods, even if they are sold by new farmers. So subsidies increase the agricultural sector (or staunch the bleeding), giving them more political power and insuring that the subsidies will be around for a while.

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