How Price Controls Hurt

In my traditionally taught course, I made the comment that subsidies/price controls hurt the poor. A reply to that comment inquired how subsidies hurt the poor. Weren’t subsidies designed to help farmers?

My reply was, absolutely, subsidies or price controls especially help local farmers. Actually, the USDA may refer to these as “price controls.” However, what I encourage people to attempt is to examine the downstream effects of such “price controls.”

“Downstream Effects” is a way of saying that one should consider the long-term effects of choices we make that initially may make perfect sense, in the short-term. Also, one should consider the effects across a range of activities and not simply focus on one activity.

I used SUGAR to illustrate my example.

First some geography. 160 million metric tons of sugar is produced each year. Sugar comes from either sugar cane or sugar beets. The primary producers of sugar, in order of amount produced, are Brazil, India, the European Union, and China. In the United States, four states produce domestic sugar – Texas, Louisiana, Florida, and Hawaii. In 2010, the United States produced 7.6 million metric tons, and we consumed 10.0 million metric tons. Obviously, we had to buy some (import) to meet our demand.

In simple terms, price controls help domestic sugar farmers. Sugar can be produced much more cheaply in other parts of the world. Sugar farmers cannot compete in an open market, and have successfully lobbied to have sugar imported into the United States inflated in price to match the price of United States sugar.

According to the United States Department of Agriculture, Economic Research Division, sugar prices in the United States are 2-3 times higher than the World Price for sugar. I have prepared a chart illustrating those prices, and they are readily available on the USDA/ERD Web site.

Price per Pound (cents)
Year 2011 2010 2009 2008 2007
United States 62.9 57.0 53.5 51.8
World 35.6 33.3 15.7 17.9 12.9

No doubt, inflated sugar prices help U.S. sugar farmers stay in business. Plus, U.S. sugar farmers also employ over 100,000 people.

The costs of sugar are passed along to millions of U.S. consumers, though. Sugar, as I am sure you are aware, is found in plenty of food items, and the costs of those food items is based, in part, on the cost of inputs to make that food item. That Snickers, gummy bear, Valentine’s Day chocolate, or bowl of Lucky Charms, costs you, as a consumer, a little more because of the sugar used in production of that product.

As costs for inputs increase, people may choose to save money, or buy less, or use their money for other products. Changes in consumer decisions can affect how many people are employed in an industry. Candy companies may opt to limit the number of employees due to a decrease in demand driven by increases in price. Factories may move abroad not because of labor costs, but because no price controls on sugar exist in Canada or Mexico.

We may make decisions based on what seems like common sense, e.g. “I don’t want to hurt farmers, I better vote on this price control measure.” That decision though can have the Downstream Effect of reducing employment, creating unemployment, and driving up the cost of groceries for all consumers. When an economic issue arises in the upcoming political season, consider examining the Downstream Effects of the proposed solutions.

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