Subsidises and complaints

Over at the Standard they have made an inference I agree with, namely that a subsidy doesn’t just increase consumer surplus, but they have taken it in a way I disagree with.  Given I have no time I will just pull my comments out of the blog and put them here 🙂

I agree with Tom here. It is ridiculous to claim that an outcome (note: the fact that the whole surplus hasn’t accrued to consumers) is “bad” based on a counterfactual that can’t happen.

Although Marty does state it can’t happen, he also stated:

“fewer people are taking up the opportunity than otherwise might”

In order to say that this is a bad thing. Now, when the counterfactual isn’t realistic this isn’t a fair claim.

And:

“The Key Government should have seen this coming and set up mechanisms to prevent it, such as the government doing the insulation itself with sub-contracting if need be as a monopolistic buyer”

Two things here:

1) The fact that the surplus is split between consumers and producers isn’t necessarily a bad thing – even in perfect competition the fact that the cost of insulating houses rises in the quantity is sufficient for this result to hold.

2) If the government sub-contracts to a monopolistic buyer the pricing issue will be the same. If the government gave the money to consumers instead of producers the pricing issue would be the same. And finally, if the government decided to make the stuff itself I highly doubt they would do so more efficiently.

I agree with you that the government complaining about the fact that some of the surplus accrued to firms is dumb. However, I don’t really agree that there are alternate structures that would have changed the allocation of the surplus – and if even if there was (like the government taking control of the industry) I don’t think they are preferable.

Make of my comments what you will.

Note:  Paul Walker at Anti-Dismal also has some issues.