Cameron Williams* says:
Sun Chips has recently begun an advertising campaign in which they promote their use of solar energy to make their product, one implication being that, although Sun Chips may be a bit more expensive, the price is worth it because the consumer is also helping the environment. The problem is that other chip companies can use dirtier, cheaper methods of production, and thus be able to charge a lower price. This is an example of the flawed market structure in which negative externalities are not capitalized into the cost of a product.
Similarly, in the water economy, the cost of water is not accurately reflected in the end product. Despite having drastically different virtual water quantities, a salad and a hamburger are fairly similar in price. Due to water subsidies and an abundance of basically free water for farmers in places like India, the actual cost of the water is not incorporated into the hamburger, which, theoretically, should cost much more than the salad. Until the virtual water cost is fully capitalized into everyday products like food and clothing, people will continue to consume too much meat, which, by requiring large amounts of water, leads to shortages and exorbitant prices for water in poor, developing countries.
Bottom Line: As always in economics, a well-meaning subsidy has long term disastrous consequences.
*Cameron is a finance/economics major at the Stern School of Business at NYU.
4 comments:
Water is just one of many inputs required to grow food. People will probably always value meat more than salad, because it is more nutritious on a pound for pound basis, can be used in many ways, and can be preserved.
But the basic premise that subsidies, well meaning or not, are very bad policy is sound. The existing giant water projects we are fighting about in California were stimulus projects. It is probable that they have increased GDP and tax revenue more than they cost, so the stimulus "worked". Still, resources were mis-priced, and people were lured into business decisions that may be unsustainable. People take warning, today's "green initiatives" and similar boondoggles are apt to end sadly.
Subsidies compound the Knowledge Problem by making costs less transparent. By providing false or unreliable price information they reduce efficiency of rersource use.
Please don't respond with claims about market failures and short term thinking as these arguments ignore the Knowledge Problem.
"As always in economics, a well-meaning subsidy has long term disastrous consequences."
Thanks for reminding us how bad subsidies are. It's not free market capitalism if some products are made cheaper with subsidies and true costs are hidden.
Mr. Williams makes an informed, sound argument. The problem as always with subsidies is that the benefits are nicely concentrated, but the costs are diffuse; so when you have a political system that directly assigns districts to its legislators, this situation is difficult to avoid as such subsidies often serve to buy votes on other issues. Regardless, an insightful analysis of the water economy
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