Whenever a government subsidizes a particular good or service, it necessarily encourages overproduction of that good or service relative to what would occur in a free market. If some good is seen as being underproduced by the market, then subsidies would thus seem to provide a good solution. The gleam and glimmer of the subsidy solution often dims, however, when the full effects of its market tamperings become evident. Consider this CNN story on rising beer prices in Germany, for example. German beer prices might rise by 15 percent due partly to a doubling of the price of barley, which in turn occurred in large part because of giant subsidies given to farmers who produce oilseed rape, a crop that can be used for biofuel. Because of the government subsidy, farmers now find it more profitable to grow oilseed rape rather than barley. As farmers switched crops, supply of barley has tightened and prices have risen accordingly, making the cost of doing business more expensive for brewers and anyone else who might need the grain.
"But Jeff," says Fig, "surely increased barley prices are worth encouraging the development of alternative fuels?"
Almost certainly not. Grains like barley aren't just used for making beer, but also as animal feed on farms. When the feed becomes more expensive, so too do dairy and meat products. Higher food costs hurt the poorest most, who spend a larger percentage of their budget on groceries than the better off. The senseless American subsidy for corn ethanol, for example, has driven up the demand for corn so sharply that protests have occurred in Mexico because the price of tortillas—a staple in the diet especially of the poor—has doubled.
American taxpayers also spend billions of dollars subsidizing (Read: paying for the overproduction) of the very crops that make Americans some of the world's fattest, while various other farming subsidies do little more than to ensure that vast American and EU farming concerns can keep their prices just low enough to undercut farming operations in poorer countries around the world. Where are the benefits that justify these costs?
Coincidentally, I notice the cover of next week's Economist:
Might you be able to guess why the end is nigh?