Posts tagged public choice
Today's Quote of the Day...

…is from Randy Holcombe and Russ Sobel’s 2001 Public Finance Review paper Public Policy Toward Pecuniary Externalities:

If property rights were limited to the right to own and use property unencumbered by the interference of others, and if all scarce resources had clearly defined property rights, technological externalities would be prevented. The political process goes further by allowing individuals to assert claims not only to the use of resources they own but also to the value of those resources. Fluctuations in the value of resources are an integral part of the market process, however, and the efficiency of the market process is impaired when public policy acts to prevent pecuniary externalities. If the legal system made it clear that rights to the ownership of economic resources would be protected but rights to the value of resources would not, the problem would be reduced. However, when political decisions rely more on democratic politics than on legal rules, the opportunity to use the political system to be compensated for pecuniary externalities increases. In a political environment, rent seeking for compensation from harm due to pecuniary externalities may even have an advantage over other types of transfers, because pecuniary externalities do impose costs, increasing the apparent legitimacy of a claim for compensation.

JMM: What Holcombe and Sobel call “technical externalities” are what we currently think of externalities: pollution and things like that which affect a firm or individual’s production (they produce fewer goods with the same input). Pecuniary externalities, on the other hand, are when the value of output is reduced, but not the ability to produce, such as through competition. For example, if Burger King were to open next to McDonalds, it inflicts a pecuniary externality onto Burker King by eating (pun intended) into their profits, but there is no technical externality.

Today's Quote of the Day...

…is from Henry Home, Lord Kames’ 1751 treatise Essays on the Principles of Morality and Natural Religion and can be found on page 87 of the 2005 Liberty Fund edition:

It is agreed on all hands, that justice is established among men for making them good citizens, or, in our author’s words, for public utility; consequently that public utility is the sole end of justice. It ought however carefully to be attended to, that in no case is it made our duty to act for the public good: we are left at liberty by the moral sense to act for the public good if we incline; but the moral sense lays us under no obligation. The good of mankind, or even of our own country, resulting from an endless variety of combined circumstances, is an object too complex and intricate to be taken under consideration by a creature so limited in capacity as man.

JMM: For Lord Kames, a duty is something that is compelled by a [natural] law. It is something heavily imbued within us that goes beyond mere approval or disapproval and can often be compelled. They are “plain and simple acts” (this quote appears later on the same page): things like obeying parents, being grateful to benefactors, not robbing or causing violence, etc. It does not entail benevolence, as these rules are (as Adam Smith would put it about 8 years later) loose and vague and what constitutes a “public good” is highly complicated. Thus our duties are simple to one another, and other virtuous acts are applauded but not compelled; what is virtuous and what is vicious can depend heavily on the situation at hand.

The Subtle Adam Smith

Over the past week, I was in Holland, MI attending a conference sponsored by the Liberty Fund called “Liberty and Responsibility in Adam Smith.” One topic that came up was the face that Smith will sometimes split his discussion of a topic into multiple parts, scattered throughout his book. This, of course, can make interpreting Smith difficult and can lead to some accidental cherry-picking of his writings to justify various things.

An interesting example of him splitting the discussion occurs in the Wealth of Nations. On page 83-84 of the Liberty Fund edition, Smith warns against political power of concentrated groups:

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters [employers], being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, awhile it prohibits those of the workmen, We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

From this passage, one might (reasonably) conclude that Smith would potentially support anti-trust legislation (broadly defined here to include things like trade groups which conspire to control prices of labor, such as cartels).

But Smith’s discussion doesn’t end there. He makes a very similar, but more descriptive, comment later on. On page 145, he writes (emphasis added):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Notice what is going on: Smith is qualifying his statement and his discussion on page 83-84. Yes, people of the same trade will conspire against the public good. But that conspiracy does not in and of itself justify legislation against it! Indeed, such legislation would be unjust!

Smith is a very nuanced writer. He is hard to pigeonhole into pre-defined political categories. But one thing we see over and over with him is his caution on legislation. Smith certainly has a presumption of liberty and just because some event may justify a legislative response does not mean that legislative response is desirable.

For more on this, see my short piece at Adam Smith Works.

Today's Quote of the Day...

…is from page 57 the 2002 edition of Milton Friedman’s 1962 classic Capitalism and Freedom:

It is not too much to say that the most serious short-run threat to economic freedom in the United States today - aside, of course, from the outbreak of World War III - is that we shall be lef to adopt far-reaching economic controls in order to “solve” balance of payment problems. Interferences with international trade appear innocuous; they can get support of people who are otherwise apprehensive of interference by government into economic affairs; many a business man even regards them as part of the “American Way of Life”; yet there are few interferences which are capable of spreading so far and ultimately being so destructive of free enterprise.

JMM: Freidman wrote these words in 1962. How little things change

How Do We Decide Who We Can Trust?

Writing for the AEIR, Art Carden has an excellent article entitled “Government is Not a Wise Steward.” In the article, Art is discussing differing ways to use tax dollars. Art writes:

Given its track record, it’s not at all clear to me that the U.S. government — or my state, county, or local government — would be a wise steward of any money I feel like I don’t need. You know those bumper stickers that say something like “It will be a great day when schools have all the money they need and the army has to hold a bake sale to buy a tank,” or something like that? I’m not sure I want more of my money going to an entity that spends so much on tanks and bombs.

Should they [government] give it [tax dollars] to charity? Maybe. Even then, the decision isn’t quite as clear-cut. There are a lot of nonprofits that seem to exist strictly to raise funds, not to actually solve any problems, as Tyler Cowen points out in his book Big Business: A Love Letter to an American Anti-Hero (which I discuss here). Even if we address the possibility that we end up joining a scam like the Bluth Foundation’s battle against TBA, Yoram Barzel famously argued that it is very difficult to give away money in a way that benefits the people we are trying to help. Even for the devoted humanitarian with resources like GiveWell at her disposal, “Give your money to charity” wouldn’t obviously deliver maximal bang for one’s benevolent buck.

The issue of which charity to give to, whether it be private or public money, is always tricky. The point of charity is to do good, and ideally you want your dollars going to purify water in Africa or protect the Icelandic puffins rather than pay someone’s salary in the US. But how do we get that sort of information? How do we get the knowledge needed to know who we can trust, whether it be to save the whales or sell us our dinner? After all, it is not from the benevolence of the brewer, baker, and butcher that we get our dinner.

Interestingly enough, that knowledge is gained through the competition process. Suppliers do not compete with other suppliers on price alone (same with buyers against other buyers). One of the things that they compete on is trust: You trust that the supermarket will sell you non-contaminated food. You trust the bank will not steal your money. You trust that the burger you get from Five Guys in Colorado will be just as good as the one you get in Maryland. As Hayek wrote in The Meaning on Competition, part of the competitive process is to teach us who will best serve us.

Thus, with government as steward, without a robust competitive process, there is no way to generate that kind of knowledge. And with government, it is hardly competitive. In other words, government is unlikely to be a good steward with funds (opting, say, for health care or education over bombs) because it lacks the very ability to get that form of local knowledge needed to know who the best recipients of funds should be.

Of course, the private sector competition is not perfect. As Art points out, there are a lot of difficulties in determining charities. But we only have the information that some charities are relatively better than others because of that competition.

If government were to be a good steward, it would need certain kinds of information, but that information is only available locally and through competition.

Where's Mine?

Today is Frederic Bastiat’s birthday. He was born in 1801 in Bayonne, France. To celebrate, I am rereading his 1850 tract, written mere months before his death, The Law. I came across this line:

Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.

Last week’s Democratic debate captures Bastiat’s observation quite well. Many of the candidates properly recognized some legal plunder going on in the law by legislators and special interest groups. But not a single one of them proposed stopping that legal plunder. Virtually all of them discussed ways in which they, or the people they supposedly represent, want to share in the legal plunder: whether it be “forgiving” various forms of debt, or taxing more of a certain group of people, or whatever.

A concrete example may help here: student loan debt “forgiveness” or “cancellation.” The idea is simple: people have loan debt, and it is substantial. Therefore, if the government were to, in its misguided philanthropy, forgive that debt, people will be made better off. Many of these people wrongfully took loans without understanding them or without fully being told the consequences of borrowing the money they did. Universities and the debt holders benefit from these loans, and many forms of legislation currently on the books promote this wealth transfer from students to universities and credit holders, not the least of which is the subsidized student loan program of the federal government.

But debt cancellation does not end this legal plunder. In fact, since no one proposed removing that legislation, the schema for legal plunder remains in place (this fact alone should raise questions about the effectiveness of debt cancellation even if the problems we are discussing weren’t here, but no one mentions it). Thus, no one is talking about ending the legal plunder, but ways to participate in it. Debt cancellation is a wealth transfer from one group, taxpayers without college degrees and debt holders and future college students, to another group: current student loan borrowers.

The “where’s mine?” mentality is very powerful. I suspect that in a democracy it will be even more difficult to eliminate legal plunder, with most politicians seeking to curry favor by promising “have yours!” The Democratic debates and the entirety of Trump’s trade policy reflects this point.

Today's Quote of the Day...

…is from page 107 of the 2009 Mises Institute re-issue of FA Hayek’s 1948 book Individualism & Economic Order:

In principle the industrial protectionism and government-supported cartels and the agricultural policies of the conservative groups are not different from the proposals for a more far-reaching direction of economic life sponsored by the socialists. It is an illusion when the more conservative interventionists believe that they will be able to confine these government controls to the particular kinds of which they approve. In a democratic society, at any rate, once the principle is admitted that the government undertakes responsibility for the status and position of particular groups, it is inevitable that this control will be extended to satisfy the aspirations and prejudices of the great masses.

JMM: Hayek first wrote these words in 1947. They remain relevant today. Modern conservatives, in an effort to supposedly constrain socialism, turn to the very policies the socialists advocate. They make the mistake of believing, despite all evidence to the contrary, that their intervention is not the blunt hammer of socialism, but rather a precise scalpel that can just cut out whatever problem they see in society and leave the rest untouched.

But once the cutting begins, especially without an appreciation of how interconnected things are, greater damage is done. And to fix the problems of this one cut, other cuts need to be made, and the problem grows exponentially.

The industrial protectionism of conservatives is just a different flavor of socialism than the left-wing variants.

Today's Quote of the Day...

…comes from the Preface of Mordenkainen’s Tome of Foes: A Dungeons and Dragons Supplement:

Perhaps it’s no accident that this book contains Mordenkainen’s first expression of the Balance. In here, he starts to describe the multiverse as a collection of opposing forces, each one trying to tip the scales of fate in its favor. But where does that leave us—all the soldiers in all these wars? Surely for the soldiers of all sides, a war is better when it is over.

Are you a soldier? What war do you fight? Whose side are you in? Law or Chaos? Evil or Good? Can you be sure that Mordenkainen would judge you as you judge yourself? When he puts his thumb on the scales to preserve the Balance, can you be certain that the weight of that finger will not crush you?

JMM: Protectionists often like to argue they are merely trying to get “a level playing field.” But, just like Mordenkainen putting his finger on the scale to restore the Balance, many people are crushed in the mean time. To the protectionist, they are simply dismissed as merely casualties that need to be sacrificed in the name of The Balance Of Trade. They are merely pawns to be sacrificed on their chessboard of politics.

And sometimes there are those who support The Balance but then find themselves crushed by the finger. Whirlpool, for example, who demanded tariffs in the name of fairness only to find themselves get crushed by the very fingers they demanded balance the scale.

Beware the sugar-coated words of those claiming to maintain some Balance; for those of us who live in the real word, who do not have the privilege of playing God, will often find themselves poisoned by those same words.

The Presumption of Liberty in Adam Smith

As I discussed the other day, Adam Smith had a presumption of liberty that permeates his “liberal system.” There were exceptions that could be made, naturally, but these exceptions mere existence did not in and of themselves justify the sovereign to act. Consider one such example discussed in the Wealth of Nations (emphasis added):

Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire. As among the different provinces of a great empire the freedom of the inland trade appears, both from reason and experience, not only the best palliative of a dearth, but the most effectual preventative of a famine; so would the freedom of the exportation and importation trade be among the different states into which a great continent was divided. The larger the continent, the easier the communication through all the different parts of it, both by land and by water, the less would any one particular part of it ever be exposed to either of these calamities, the scarcity of any one country being more likely to be relieved by the plenty of some other. But very few countries have entirely adopted this liberal system. The freedom of the corn trade is almost every-where more or less restrained, and, in many countries, is confined by such absurd regulations as frequently aggravate the unavoidable misfortune of a dearth into the dreadful calamity of a famine. The demand of such countries for corn may frequently become so great and so urgent that a small state in their neighbourhood, which happened at the same time to be labouring under some degree of dearth, could not venture to supply them without exposing itself to the like dreadful calamity. The very bad policy of one country may thus render it in some measure dangerous and imprudent to establish what would otherwise be the best policy in another. The unlimited freedom of exportation, however, would be much less dangerous in great states, in which the growth being much greater, the supply could seldom be much affected by any quantity of corn that was likely to be exported. In a Swiss canton, or in some of the little states of Italy, it may perhaps sometimes be necessary to restrain the exportation of corn. In such great countries as France or England it scarce ever can.

Page 539.39

In short, there may be good reason to limit exports of food to a neighboring country if they are so famished that they would draw away local food production due to higher prices. However, this potential exception does not in and of itself justify the prohibitions. Smith goes on to say (emphasis added):

To hinder, besides, the farmer from sending his goods at all times to the best market is evidently to sacrifice the ordinary laws of justice to an idea of public utility, to a sort of reasons of state; an act of legislative authority which ought to be exercised only, which can be pardoned only in cases of the most urgent necessity. 

Page 539.39

The act of interfering in trade is a sacrifice of the ordinary laws of justice, the laws the sovereign is sworn to uphold in the liberal system of Adam Smith (for the list of sovereign duties, see Pg. 687.51). Thus, Smith reasons, the sovereign should only undertake these exceptions, not when it is merely justified, but when it is “urgent[ly] necessary.”

Another example of this high burden of proof exists in his discussion of the national defense exception to free trade. Smith writes:

There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry.

The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country in some cases by absolute prohibitions and in others by heavy burdens upon the shipping of foreign countries.

Pg. 463.23-24

However, Smith goes on to say this mere justification is not enough (emphasis added):

When the act of navigation was made, though England and Holland were not actually at war, the most violent animosity subsisted between the two nations. It had begun during the government of the Long Parliament, which first framed this act, and it broke out soon after in the Dutch wars during that of the Protector and of Charles the Second. It is not impossible, therefore, that some of the regulations of this famous act may have proceeded from national animosity. They are as wise, however, as if they had all been dictated by the most deliberate wisdom. National animosity at that particular time aimed at the very same object which the most deliberate wisdom would have recommended, the diminution of the naval power of Holland, the only naval power which could endanger the security of England.

Page 464.30

The acts of navigation, which were indeed a violation of the ordinary laws of justice, were justified and proper (note this word “properly” appears in his initial justification in paragraph 24) in this particular case because war with Holland was inevitable and imminent. National defense, then, is not a broad exception to the liberal system of free importation and free exportation, but rather a very specific exception in the face of imminent national danger.

The duties of the sovereign in Smith are threefold: defend the nation from outside invasion, enforce the rules of justice domestically, and provide public works that are necessary and proper for the nation. These actions imply a presumption of liberty within the liberal system. The sovereign certainly has the right as a sovereign to perform certain actions that may violate liberty, but this power is one that must be executed with propriety as it violates the role of the sovereign as administrator of justice. Violations of the most ordinary laws of justice should not be undertaken lightly, and as these above quotes show (and many others throughout the Wealth of Nations, Theory of Moral Sentiments, and Lectures on Jurisprudence, not to mention his own correspondences), mere justification for a sovereign act is not enough to authorize such an act.

Adam Smith and the Nirvana Fallacy

Adam Smith was no anarchist. Indeed, at the time he was writing, he was a fairly conservative liberal (interesting that those of us who follow Adam Smith’s teachings are considered radical). Adam Smith did have a strong presumption of liberty, but this presumption was not absolute. Under certain conditions, a jural superior (such as a sovereign or magistrate) could violate this presumption of liberty.

But Smith’s analysis did not stop there. He also explored the nature of the jural superior. While Smith does have a science of the legislator, he also repeatedly emphasized that jural superiors are also human beings like us.

To give one such example, in the Theory of Moral Sentiments, Smith writes on how it is a natural human reaction to feel resentment and revenge when once does something against us. Indeed, not rendering gratitude where gratitude is due can cause this passion to arise (see Part 2, and especially Section 2). This jealousy can cause us to act in a harmful and unjust manner; beneficence cannot be extracted by force. But, while Smith is examining jural equal relations here, he also applies this same sentiment to national governments and legislators. In The Wealth of Nations, when Smith is discussing a potential use of tariffs to reduce/eliminate tariffs by other governments, he begins by stating that, when one nation raises tariffs on another “[r]evenge…naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours. Nations, accordingly, seldom fail to retaliate in this manner“ (Page 467.38). Revenge, that natural emotion according to Smith, is applied to national governments here and not just individuals. Smith goes on to tell of a trade war between the Dutch and French which became a shooting war.

After this story, Smith lays out his potential exception to the aforementioned presumption of liberty (Emphasis added):

There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. 

Page 467.39

However, he immediately follows it up with a reminder that we are dealing with people here. The science of a legislator may recommend this policy, but we must remember we are dealing with people with passions, not necessarily a dispassionate legislator:

To judge whether such retaliations are likely to produce such an effect does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.

Page 467.39

He then brings us back to the presumption of liberty:

When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people to do another injury ourselves, not only to those classes, but to almost all the other classes of them. his may no doubt give encouragement to some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home-market. Those workmen, however, who suffered by our neighbours prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favour of that particular class of workmen who were injured by our neighbours prohibition, but of some other class.

Page 467.39

By starting with a reminder that revenge is a natural passion within our breast and a story about a war of jealousy between two nations, Smith argues that the probability that higher domestic tariffs will lead to the reduction of foreign tariffs is not particularly high.

Smith avoids the trap that many economists after him would fall into: the Nirvana Fallacy. A term first coined by the late Harold Demsetz, the Nirvana Fallacy is when one compares an imperfect current situation to an idealized alternative. Mid-Century economists often made this mistake by pointing to market failures and justifying some policy to correct these failures. Public Choice economics expanded on the Nirvana Fallacy by assuming government actors are just like market actors. Smith did not fall into this trap, and thus his presumption of liberty was extremely strong in his eyes.

The fun thing about reading Adam Smith is seeing insights in his work that would, for one reason or another, be lost to economists only to be discovered centuries later. The example above of the Nirvana Fallacy is one, but Smith also had many insights into Law & Economics.

Adam Smith had a presumption of liberty, and while that presumption was not absolute, he was under no impression that the mere existence of a justification for policy X or Y was in any way sufficient to create policy X or Y. After all: “They whom we call politicians are not the most remarkable men in the world for probity and punctuality” (Lectures on Jurisprudence, Pg. 539).

Today's Quote of the Day

Comes from Ball State University economist Steve Horwitz, who writes on Facebook:

The question remains: why do we want to leave "essential services" in the hands of people operating under institutional incentives that put their self-interest at cross-purposes with providing the essential services in question? When your whole manner of raising and allocating funds is completely separate from actually providing those services, you are at the mercy of third parties with their own interests at stake.

Food is pretty essential, but Kroger doesn't "shut down."
Clothing is pretty essential, but Lands End/Eddie Bauer etc don't "shut down."
Amazon doesn't "shut down."

If you really think services are "essential," why would you leave them in the hands of people whose incentives are primarily, if not exclusively, political, rather than oriented toward service provision?

The great virtue of the market process is it turns self-interest toward the greater good. The great vice of politics is it turns self-interest against the common good.

Jon Murphypublic choice
On the Optimal Tariff and the Law of Demand

In his 1987 Economic Review article detailing the history of optimal tariffs, Thomas Humphrey writes:

“[The optimal tariff model] assumes unrealistically (1) that foreign countries will not retaliate with tariffs of their own, (2) that elasticities of supply and demand in foreign trade are not so large in the long run as to render the tariff ineffective, (3) that the optimum tariff rate can be precisely identified and skillfully administered, and (4) that politicians can resist pressures to raise tariff rates above the optimum level” 

All four of these objections of the optimal tariff model are difficult to overcome when addressing the model as a policy procedure. I have written on some of these other points before (as have many people far smarter than I). However, I want to focus on point #2 and I’ll try to keep this not wonky.

That the optimal tariff model depends on elasticities of supply and demand is not controversial. Indeed, that is how the calculation of the tariff works. However, given condition (2) above, we can see the optimal tariff is, at best, a short-run policy. This follows from the Law of Demand.

Most people tend to think of the Law of Demand in its common form: all else held equal, an increase in the price of a good will reduce the quantity demanded of that good. But there is a second Law of Demand: the longer a price remains relatively high, the more elastic the demand for a good becomes.

Given that the goal of a tariff is to increase the relative price of a good, then as long as the tariff remains in place, the more elastic demand for that good becomes. Indeed, if the tariff remains in place and, again, everything else held equal, over enough time, the tariff could cause the demand curve for a good to become perfectly elastic. A perfectly elastic demand curve would indicate no consumer welfare gains from the trade. The elimination of consumer welfare would then mean that the tariff is a net welfare loss for the country in question. So, an optimal tariff cannot persist in the long run, only in the short run given the Second Law of Demand.

Some might object by saying: “But wait, Jon, you sly and handsome devil! That would just mean the optimal tariff would need to be reduced. There’s no reason to think the tariff would eventually become a net welfare loss.”

Indeed, it may very well be that some benevolent government can milk the tariff for everything its worth by constantly adjusting the optimal tariff as the elasticities change. However, this is where public choice comes into play. As Gordon Tullock discussed in 1975, government support of firms is very difficult to remove. Domestic producers have capitalized on the gains the tariff has provided them. To remove the tariff is not to eat up “extra normal” profit for monopolizing firms, but rather to eat into normal profit for them. These firms are legitimately harmed, profit-wise, by the removal or alternations of these protections like an optimal tariff. Any adjustment to an optimal tariff, even if demanded by the economic scenario is likely to be fought tooth-and-nail by affected firms. The resulting stagnation will likely result in an optimal tariff that is too high! Any short-run gains from the optimal tariff (assuming all the above conditions are met) would likely be eaten up by this un-optimal tariff that results from the changing elasticity and lack of change in the statuary tariff.

In a general-equilibrium theoretical framework, an optimal tariff makes perfect sense. But, once public choice enters the fray, the reasonableness of an optimal tariff goes out the window. And, as my professor Garett Jones likes to say: in a knockdown fight between general equilibrium and public choice, public choice wins every time.

HT to Dallas Weaver, whose comment on this Cafe Hayek blog post inspired this post.