An Economic Eye

Domestic producers have incentive to pressure the government for trade barriers, which reduce competition from abroad and raise both the price and the quantity of their sales. Not only do these producers reap concentrated benefits from protectionism on the aggregate; they also have individual incentive to lobby. Cognizant of the deadweight losses inherent in the imposition of trade barriers, the government narrowly defines protected markets, often catering only to those producers that offer political support in exchange. The free-rider problem characteristic of collective action is thus minimal in the producer lobby. Since the costs of protectionism, in contrast, are widely dispersed, consumers are rationally ignorant and thus complacent. Opposition to protectionism is further hindered by free-riding. Similar to the game theoretical model of the prisoners’ dilemma, each consumer chooses between contributing to the lobby for free-trade and yielding to the redistributive trade barrier. Free-trade’s lower prices would be non-excludable and any given consumer would prefer to benefit without contributing to the lobby; an individual should free-ride if others contribute. If others do not contribute, he should as similarly free-ride because one contribution alone would make little difference and would come at a personal cost. The dominant consumer strategy is thus to free-ride. (Fig 1) The strength of producers’ lobby and the weakness of consumers’ opposition can explain the persistence of inefficient trade barriers.

The U.S. peanut program epitomizes this public choice explanation. Since 1949 the federal government has restricted the number of sellers, instituted price supports, and limited imports. The producer benefits are concentrated. From 1982-1987, the average annual transfer from peanut consumers to producers was $255 million, a significant $11,000 per farmer. The costs to consumers, in contrast, are widely dispersed and non-excludable. In addition to the $255 million transferred annually to producers, consumers bore $34 million in deadweight losses. (Deadweight losses arise as consumers who value peanuts at the competitive price exit the market because restrictions on cheaper, foreign peanuts drive up prices while less-efficient, domestic producers who can only farm peanuts at a cost above the competitive price enter due to the subsidy.) Despite the extortionary total cost of the peanut program to consumers, the average annual cost per person from 1982 to 1987 was a relatively insignificant $1.23. With concentrated producer benefits and dispersed, non-excludable consumer costs, the peanut quota exemplifies why governmental failure to act in the public interest may persist.

David Strömberg proposes a model that implies the strengthening of consumer power. In “Mass Media and Public Policy” Strömberg seeks to “analyze the effects of mass media provisions of news on a number of policy issues,” including trade barriers. He predicts that media coverage will rise with the number of people affected providing “a megaphone that reaches exactly the large, dispersed groups which may otherwise be disadvantaged since they cannot overcome the free-rider problem and organize in lobbies.” In this paper, I first critique Patricia Kuzyk and Jill J McCluskey’s attempts to “test” Strömberg’s hypothesis with case studies selected on the dependent variable. I then partially refute their findings using Edward Gresser’s analysis of tariffs on light consumer goods; cognizant of the divergent analyses, I recommend a more empirically-sound collection of evidence. Finally, I take the Strömberg hypothesis as given and propose an analysis of its political and economic implications as related to public choice theory and the Peltzman model.

Full text for this document can be viewed via the following link: The Strömberg Model: Testing and Implications