Government & the Economy
Who do you trust more, the government or markets?
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- Who do you trust more, the government or markets?
The tension between government policy and markets is best understood by considering lobbying efforts by special interest groups. Many groups have strong incentives to lobby for policies, often at the expense of the general public. This leaves economists to debate whether flawed government action is a better alternative than the results of markets, which also fail to produce a socially optimal level of output.
Real World Examples
The vast majority of the public know that subsidies exist but do not really understand the complexities of the issue or the effect it has on them.However, for farmers, the issue is a very real one and there are plenty of lobbying groups that have particular self-interests. The net effect of this web of agricultural support mechanisms in place throughout the world on society as a whole represents a significant misallocation of resources. The costs of agricultural support are less than the benefits. The benefits to those who receive them, however, are very important to them. Since agricultural markets are one of the areas where markets work quite well, eliminating agricultural subsidies would create more good than harm.
In 2003, President Bush announced that tariffs would be imposed on steel imports to the U.S. This decision pleased the U.S. steel industry which was struggling to compete with imported steel. The immediate benefits were that some U.S. steel jobs were saved. However, the wider effects were quite negative and included higher steel costs dispersed across many sectors of the economy. In addition, the World Trade Organization ruled against the U.S. steel tariffs. This led to threats of retaliation from Europe on Florida oranges and cars from Michigan. Eventually, faced with the threat of significant retaliation, the U.S. backed down and withdrew the steel tariffs. The reversal drew criticism from steel producers, but won widespread praise from advocates of free trade.