Reference no: EM13982155

When the price of some important commodity or service rises rapidly, governments face pressure to do something about it. A variety of options are commonly considered. Governments can, and often do, subsidize the supply of goods seen as vital, commonly including food and fuel. Such policies are popular, often cost relatively little at first, and are politically hard to remove. But who benefits and what are the opportunity costs? Particularly in developing countries, such subsidies commonly benefit urban dwellers, and particularly the middle class, who tend to have more political influence than the rural poor. Subsistence farmers do not benefit from food subsidies. If subsidized food is imported, with the result that the domestic price falls, farmers are also likely losers. Fuel subsidies generally benefit those on higher incomes, who use more energy of all kinds. Again, this effect is particularly marked in developing countries where the rural poor may rely on collecting wood or dung for fuel, and on oxen, or their own effort, for energy inputs to food production. The opportunity costs of food and fuel subsidies are not hard to find. Government revenue allocated to subsidies cannot be spent on services like health and education, or on income support for the poor. Even where funding for subsidies is notionally derived from cutting wasteful or unproductive expenditure, the true opportunity cost is the best use to which the funds released in this way could have been put. Where governments lack the resources to subsidize prices, the simplest, and seemingly least costly, response to rising prices, is to legislate to fix the price at a ‘fair’ level, or to control the rate at which prices increase. Such policies have been tried many times, and have mostly failed.