Abstract
Politicians often see price ceilings, subsidies and third-party payments as effective ways of reducing the amount consumers pay directly for goods and services and take credit for reducing their costs. While these policies may reduce prices, they are a form of censorship that invariably increases costs. Politically inspired interference in the communication that takes place through market prices reduces the information and discipline required to control costs. The most notable recent example of politicians trying to take credit for reducing costs with policies that increase them is found in their recommendations to reform health care. There are unfortunately a number of other examples such as price controls on apartment rents and subsidies to agriculture and education.
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Notes
- 1.
Given that costs are foregone benefits, keeping costs as low as possible is equivalent to increasing benefits as much as possible.
- 2.
Censorship is not too strong a word for government actions that alter market prices for political purposes. As we have argued in a previous article (Clark and Lee 2008), the information communicated through market prices is every bit as important to our prosperity, liberty and general wellbeing as the information communicated in written and verbal forms that is protected by the first amendment to the United States Constitution.
- 3.
Fifty three percent wanted the government to impose price controls on gasoline and 45Â % were opposed (Jacobe 2008).
- 4.
The exception to such a shortage being created by a price ceiling below the equilibrium price occurs if the good is being produced by a monopolist and the price ceiling is set at the price where that demand curve intersects the monopolists marginal cost curve. We ignore this possibility here.
- 5.
Some groups will be favored over others, but largely on the basis of the relative political influence of different groups. This creates incentives for groups to lobby political authorities, which is another cost associated with government interference with price communication. See the discussion on rent seeking in Sect. 3.3.
- 6.
In most cases, it is illegal to buy and sell rationing coupons since the price paid for the coupons makes it obvious that the price (and costs) has increased. Despite the law, however, markets for coupons invariably materialize because people benefit from exchanges by transferring the rationed good from those who value it less (at the margin) to those who value it more.
- 7.
If the same marginal penalty is imposed on sellers and buyers, the expected marginal penalty on sellers will typically be higher because they are easier to catch (sellers have to make information available to potential customers that can be intercepted by the police). It will be clear that our conclusion is the same for a given expected marginal penalty no matter how it is split between buyers and sellers.
- 8.
Subsidies are often paid to producers in less obvious ways for political reasons, as when farmers in arid areas receive water from expensive water diversion projects at a small fraction of the costs, or when governments guaranty loans to producers which allow them to pay lower interest rates. Although such subsidies are more convoluted than direct cash subsidies, our analysis of the latter applies to any subsidy that lowers the private marginal cost of production.
- 9.
Another possible way to pay for the subsidy is to reduce government spending on something else. This might seem to be an attractive possibility since it would make the subsidy costless to consumers if it were paid for by reducing government spending that is wasteful already. But despite ample examples of completely wasteful government spending, eliminating such spending is not likely to be very popular to politicians. If politicians were looking for ways to eliminate wasteful spending, they would not be looking for ways to finance government subsidies that increase the cost of goods and services.
- 10.
It is noted that this conclusion depends on the supply, or marginal cost, curve being upward sloping at the equilibrium. This is almost always the case, although it is possible for marginal cost to be declining at the equilibrium as a result of a positive externality in production. We ignore positive production externalities in this paper, although we do consider arguments for subsidies based on a positive externality in consumption in Sect. 3.3.1.
- 11.
Although all consumers pay the same price for the product, the per-unit cost each consumer pays for the good varies. Those who pay little in taxes and consume lots of the subsidized good shift much of the per-unit cost of the subsidy to those who pay lots in taxes and consume little of the good.
- 12.
- 13.
Unfortunately, the information necessary to know the size of a subsidy that will efficiently internalize an externality is rarely, if ever, available. And even if it were available, the political considerations that determine what goods are subsidized, and by how much, seldom have much to do with economic efficiency.
- 14.
In general, producers are better organized than consumers, and so producers can be expected to have more influence on the type and size of subsidies than consumers. This does not imply that political influence will favor producer over consumer subsidies. Producers can benefit from consumer subsidies as much as they do from producer subsidies and may favor the former because the benefit they receive from consumer subsidies is less direct and obvious than it is from producer subsidies.
- 15.
Tullock (1967) provided the first systematic analysis of rent seeking, although he did not use that term (Tullock 2003). The term was coined by Krueger (1974) in a paper that considered examples of the competition for political influence. Tollison (1982) surveyed the main themes and implications of the rent seeking literature.
- 16.
If the subsidy results in more output, and therefore profits, than anticipated, the politicians may decide to share in the unanticipated bounty of the suppliers by increasing the rent-seeking payments for maintaining the subsidy. So in the long run, the extra output might result in higher costs.
- 17.
See Vedder and Gallaway (1999) for a discussion of different estimates.
- 18.
Of course, each person is also contributing to the care of everyone else with his own premium payment. As with government subsidies considered in Sect. 3.3, some people will end up paying more in premiums than they receive, and others will end up paying less. One can argue that it is only the latter that are being subsidized. But the important point is that everyone purchasing a good subsidized in part by insurance premiums, or taxes, will ignore the amount the subsidy is costing him when deciding how much of the good to consume. Premium payments for insurance are not marginal costs.
- 19.
The extra cost resulting from moral hazards is often more than justified in the case of insurance, because of the value people receive from replacing the low risk of a large and unpredictable cost with a the certain cost of small and predictable payments for insurance premiums.
- 20.
As reported in Cogan et al. (2005, p. 40) the average family medical insurance policy cost about $7,000 per year in the early 2000s, which reflected a high percentage of low-deductible/low-co-pay policies. At the same time, the median annual premium payment for medical insurance for a family of four with a $3,000 deductible was $2,683.
- 21.
This also makes providing low-deductible/low-co-pay medical insurance more attractive as a way to pay workers.
- 22.
According to Goodman and Musgrave (1992, p. 232), 51.6 % of all personal medical expenses in the U.S. in 1965 were paid directly by those receiving the care. In a recent paper, Goodman et al. (2009) reports that the amount of personal medical expenses paid directly for health care in the United States was only 13 %, while the average for OEDC countries was 20 %.
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Clark, J.R., Lee, D.R. (2017). Too Inexpensive to Be Inexpensive: How Government Censorship Increases Costs by Disguising Them. In: Hall, J. (eds) Explorations in Public Sector Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-47828-9_3
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