Subsidies, Subsidies

Always the same, eh?

When a litre costs 0.7p, and filling the tank of a 4×4 costs 42p, it is a fair question. Petrol is so cheap here – reputedly the cheapest in the world – as to be almost free. Even under the artificially overvalued official exchange rate, petrol is 45 times cheaper than in Britain.

Some economists call the subsidy "Hood Robin", because it steals from the poor and gives to the rich by favouring relatively wealthy car owners above the poor who rely on public transport.

Subsidies most often don\’t actually benefit those they\’re aimed at initially.

I\’ve got this half-formed thought rolling around. I\’m not quite sure whether I\’m onto something or whether it\’s actually a very silly idea, so your thoughts would be appreciated.

It\’s pretty much a basic assumption at that interface between economics and politics that efficiency and equity often are in conflict. We might say that the market distribution of incomes is efficient, but that it is inequitable. Thus we should redistribute through taxation.

Or we might say that the market pricing of petrol is inequitable, it being too high for the poor, so we should subsidise it. Or, closer to home, that heating is too expensive for pensioners so we should send them al £200 a year to increase equity, at the expense of the efficiency of the heating market and the wider economy (for all taxes have deadweight costs).

My half-formed thought is that equity and efficiency are not in quite as much conflict as many think.  An inefficient system, by definition, either uses more resources to get to a specific outcome or, gets to a  worse outcome with the same resources, than an efficient one. This in itself is inequitable, as in order to get to our (possibly) desired equitable position, the reason we\’re actually fostering this inefficiency, we leave everyone worse off in aggregate than they would have been.

Writing this out I think I\’m actually reinventing a wheel that\’s been around a long time. The answer usually given might be to do with the decreasing returns stuff: the 99th pound you have is worth less to you than the first, so taking that 99th and giving it to someone as their first might increase aggregate well being.

But I still think that there\’s less conflict between equity and efficiency than many think: that an inefficient system by and of itself is inequitable, despite that decreasing returns stuff. The question then becomes whether the increase in equity from the redistribution overcomes the decrease in it from total resources.

Yes, this is reinventing a wheel, isn\’t it?

OK, I\’m left with the statement that we need to look more closely at the claims of increased equity as against efficiency in each specific case. As there are two effects it\’s an empirical question as to which predominates in each case.

No, not knew then, just another reason to be casting the gimlet eye over claims on either side each and every time perhaps?


11 thoughts on “Subsidies, Subsidies”

  1. I can’t believe you fell for that “£200 winter fuel allowance” scam. This is not in any way earmarked – it is a straight cash bung to be spent any way you like. I believe

  2. It’s not even that complicated.

    Redistribution based on income taxes, to provide people who are poor with cash to buy things that they need, is equitable and efficient.

    Half-arsed attempts at market rigging to avoid giving money to people who are poor are inefficient and seldom very equitable.

    [so if pensioners can’t afford heating, we should raise the minimum pension level to one where they can afford heating rather than interfering in the heating market. If people on the dole can’t pay rent, we should raise the dole to a level where they can pay rent rather than interfering in the housing market. And so on…]

  3. I can’t believe you fell for that “£200 winter fuel allowance” scam. This is not in any way earmarked – it is a straight cash bung to be spent any way you like. I believe there is still such a thing as a Christmas bonus for pensioners, they could scrap the fuel bonus and increase the Christmas bonus instead. Also, the fuel bonus is paid to ex-pat pensioners as well!

    Happily John B has said everything else that I was going to say before I pressed ‘submit’ rather too soon!

  4. All taxes on transfers are immoral. Income taxation being the most immoral., as it is akin to state slavery It is also the biggest damage to comparitave advatage and thus economic growth.

    However Property (intellectual and land) value taxation fights rent seeking and also establishes rational pricing and encourages best utilisation of these assets. It also tends to be “progressive” as the wealthy will pay more. A 7% PVT would give everyone in the country way more than 5,000 GBP in a citizens dividend (i.e.un-means tested) and get rid of every other deadweight tax.

    Extorting peoples time is immoral, but making people pay for excluding others from your property is moral. Of course morality and economic growth are closely linked, so abolishing immoral taxes would also cause a massive growth in the economy, employment-demand and thus the opportunity to improve one-self.

  5. Hysterical rhetoric aside, I broadly agree with AC1. It’s a pity that the biggest voter bloc is made up of people with high-value property and limited incomes…

  6. John B, to be fair, Inheritance Tax (less than 1% of total govt revenues) and Council Tax could and should be scrapped in move to LVT, so if pensioners have a deferment option, only the very rich ones would lose out. Divide and conquer.

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