Friday, July 31, 2009

Need For Education Into Subsidies

A new survey indicates that a majority of people believe that subsidizing farmers is important to ensure a safe food supply. The results could have been affected by the wording of the question, as all survey results are, but let us suppose the finding is correct.

If the result is correct, we have a lot of educating to do. In a free capitalistic market, buyers and sellers are free to strike deals whenever the exchange benefits both parties. That is the beauty of a capitalistic system: all market transactions benefit both the buyer and the seller, and free markets allow buyers and the sellers to make as many of these mutually beneficial transactions as physically possible.

Subsidies essentially trick consumers into buying products they do not want. Suppose you purchase five bananas per week at the price of $0.50 per banana. You do not purchase six bananas, because you value the banana less than $0.50. Now the government subsidizes bananas, lowering the price to $0.40. You now consume six bananas per week, but you are still paying $0.50 per banana because the government subisides are paid for by tax dollars. You pay $0.40 per banana at the grocery store and an extra $0.10 in taxes.

Hence, subsidies make us pay for things we do not want. This is not an intuitive notion, why is why economics education is so important. After seeing this study, I have incorporated the need for education on subsidies into my course objectives for the next semester.