The Temptation to Subsidize

by Russ Roberts on January 11, 2006

in Energy, Politics

Pete Geddes of the Foundation for Research on Economics and the Environment (FREE) does an excellent job in this column describing why subsidizing "good" kinds of energy (wind farms and biofuels) have perverse effects due to political manipulation and the law of unintended consequences.  An excerpt:

When we subsidize things that trade in the market, we benefit the well
off and well organized at the expense of the most vulnerable members of
society. This holds true whether in Bozeman, Boston, or Birmingham.

Geddes goes on to quote George Will.  It’s such a good quote I dug up Will’s column (from 2/4/1993 in the Washington Post) to find the context.   The column is about how streetcar companies and later taxicab companies used regulations to keep out competition from jitneys serving poor people.  The column opens:

The world, a wit has said, is divided into two kinds of people, those
who divide the world into two kinds of people and those who do not. I
say: The world is divided between those who do and those who do not
understand that activist, interventionist, regulating, subsidizing
government is generally a servant of the strong and entrenched against
the weak and aspiring.

That last part (after "I say") is what Geddes quoted.  The ending of the column is equally eloquent:

The world is divided into two kinds of people, those who want to
prosper by competing and those who want to prosper by getting
government to cripple their competitors. America is divided between
genuine entrepreneurs and those persons whose entrepreneurship consists
of turning government into a dispenser of privilege and injustice.

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Jav January 11, 2006 at 11:11 pm

Sometimes a company that is trying to develop a new product invests in R&D or take the instance of a company providing some kind of safety net to an up-and-coming product (as in the revenue from sales of that product alone would not cover the costs but the company still does it in the hopes of getting much better returns in the long run). Could there not be an honest reason to go after alternative sources of energy?

David January 11, 2006 at 11:17 pm

That essay covers one topic that I would be interested in learning more about: how subsidization programs tend to benefit the well off at the expense of those less so. The article mentions The Logic of Collective Action, are there any other good books I should be looking into? Is there any chance that this theme, with instances of it happening, will return to Cafe Hayek?

William January 11, 2006 at 11:56 pm

This reminds me of two things:

Last year at UVa there was an attempt to get the University to buy some sort of "credits" that would support wind power. Obviously all of the University's power would still come from the same sources as before, but students would be asked to pay $7 extra in tuition. Not surprisingly, the well-meaning student body voted in favor of this measure, but fortunately, the Board of Visitors never heard about it.

The mention of taxis reminds me of my trip to Almaty, Kazakhstan, where any car willing to stop and pick up passengers is a "taxi." You stick out your arm and wait for someone to pull over. If he's going your way, you negotiate a price and get on your way. It's a pretty competitive market, and prices are cheap, even though there is price discrimination against foreigners.

Noah Yetter January 12, 2006 at 10:59 am

"Could there not be an honest reason to go after alternative sources of energy?"

Of course there is: profit. When alternative energy is profitable, the world will switch to it. Subsidies make ventures appear profitable where they are not, thereby misaligning economic decisions from reality.

Ivan Kirigin January 12, 2006 at 5:20 pm

I am very much in favor of subsidies for _research_ into alternative energies, but not for individual products. Funding an idea that turns out to be worse than something else doesn't mean that other product loses. Peer review and selective commercialization are excellent filters.

thingsbetterwithkoch January 12, 2006 at 8:28 pm

I agree. We should continue to subsidize bad forms of energy and then the laws of unintended consequences and Murphy's Law will get us the new forms of cheap good energy that will fuel our children's futures.

medusa January 13, 2006 at 7:15 am

I don't understand why we need to subsidize other forms of energy. After all, the profit for a successful new form would be so great there is already a trememdous amount of incentive.

Did anyone ever have to subsidize a 49'r?

John Powers January 14, 2006 at 10:21 am

Rather than subsidize, what if we quit peanlizing alternate energy. Ethanol from Brazil is being produced at $1/Gallon. To bring it to the US brings a $.50/Gallon tax, making it un-competitive with Gasoline.


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