Did you know that Coke used to be made with cane sugar in the U.S., but in 1984, they
switched to corn syrup?
You might wonder why they made the change.
They did it to save money.
It turns out that sugar in the U.S. is about twice as expensive as it is in the rest of
the world.
But why is that?
Well it can be explained by a concept economists talk about a lot: concentrated benefits and
dispersed costs.
Let me explain.
In 1982 President Reagan reimposed a quota on imported sugar.
Quotas restrict the amount of a good that can be imported to the U.S., which reduces
the supply of sugar and protects domestic producers from foreign competition.
When you reduce the supply of sugar with a quota the price rises.
That’s simple supply and demand economics.
As a result, American consumers pay more for sugar and products that contain sugar than
they would without a quota.
A Commerce Department study estimated the cost of the quota to consumers at roughly
$3 billion a year.
So why would the government put a policy in place that hurts the majority of consumers
and voters?
Wouldn’t that be political suicide?
Actually, no, because the $3 billion cost is very dispersed among the whole population
of consumers.
Each of us individually pays only about $10 more on sugar products a year, so we don't
even notice it.
Most of us have no idea this quota even exists.
And even if we do know about it, who's going to take the time to complain to the government
or spend money to lobby to change the law?
All that trouble over $10 a year?
Meanwhile the benefits of the quota are very concentrated.
Between 1980 and 1998, each American sugar farmer made roughly $3 million a year extra
as a result of the quota, so each of them is willing to spend a lot of time and money
making sure the law stays that way.
They sent lobbyists to DC to talk to politicians because they need the quota to protect them
from foreign competition.
If the quota were removed, they would lose a lot of money.
And some of them might even go out of business.
So from a lawmaker’s perspective you have one side giving you all the reasons why the
policy’s so important, arguing we need the jobs or the industry or whatever their case
is, and you have another side that hardly speaks up at all.
Which way are you going vote?
It is pretty obvious.
Concentrated benefits and dispersed costs.
This simple concept explains so much of the policymaking and money spending that goes
on in Washington.
So what can we do to improve accountability and get rid of wasteful spending?
Unfortunately, as long as we allow government to make policies that only benefit a certain
group, that special interest will have a big incentive to get involved in politics.
If we don't want large agribusiness and other big corporations lobbying for these benefits,
the only real answer is to limit what the government can do.
More regulation or oversight won’t fix the problem.