Wednesday, January 2, 2008

Greg Mankiw on the Losses From Trade Protection: Is Government Spending Worthless?

Did Greg Mankiw simply slip up with the following passage?

Chapter 9 of my favorite textbook presents the standard analysis of a tariff (a tax on imports) and shows that it reduces economic welfare as measured by the sum of producer surplus, consumer surplus, and tax revenue. Even though the tariff makes domestic producers better off and raises some revenue for the government, these gains are more than offset by losses to consumers, leading to a deadweight loss.

Most economists would recognize the consumer surplus loss as a reduction in economic welfare. The difference between what domestic producers gain and what consumers lose is this “producer surplus” loss so no disagreement there either. Consumer losses also include the extra funds that go into tariff revenues but most economists see government spending as having at least some value. So to include all of the tariff revenue as part of the reduction in economic welfare is either sloppy analysis or just a minor slip up on the part of Dr. Mankiw. But then his quiz on the effects of a Chinese export tariff included this question:

What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?


Econoclast said...

Dr. Mankiw asks: >What happens to total welfare in China, as measured by the sum of consumer surplus, producer surplus, and tax revenue?<

what happened to total welfare in China when the country was opened to free trade of opium?

Jim Devine

Anonymous said...

do i have to read the rest?

the formula seems fatuous on its face.

american industrial wealth was built on the tariff

and one would have to argue for a long time to convince me that a dollar less per consumer for some non essential, probably sub standard "good" made up for a million dollars in the hands of some "infant industry" even if there are more than a million consumers.

YouNotSneaky! said...

I don't see the slip up. He says "the tariff ... raises some revenue for the government, these gains..." indicating the tariff revenue is counted as a gain to government, hence counted in total welfare. Of course this gain is more than offset by the losses to consumers. But it's pretty clear that the gains include an increase in producer surplus and higher tariff revenue.

kevin quinn said...

yns beat me to the punch, but yes, this is the standard analysis. The standard analysis may be problematic, but Mankiw has not mis-stated it.

ProGrowthLiberal said...

Maybe this is a wording issue then with the word sum messing things up. I would word it as follows: loss in overall welfare = loss in consumer surplus MINUS the sum of the gain in producer surplus and increase in tariff revenue. I guess this is why we draw graphs on the chalk boards in the class room and hope our students are following what we draw.

Anonymous said...

proving once again that to an economist the value of a dollar in the hands of a poor man is the same as the value of a dollar in the hands of a rich man. there are no second or third order effects. and of course french cuisine is no different from mcdonalds. and rice farmers in japan are less valuable to the japanese than rice farmers in california.