This is “The Consumers’ Lobbying Decision”, section 10.4 from the book Policy and Theory of International Economics (v. 1.0).
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If the $5 tariff is implemented, it will raise the price from $30 to $35. Consumption will fall from ten million to nine million pairs of jeans. Because of our simplifying assumption of one household per pair of jeans, one million households will decide not to purchase jeans because of the higher price. They will use the $35 to buy something else they think is more valuable than jeans. The other nine million households will pay the extra $5. This means that, at most, a household has to pay an extra $5 for the same pair of jeans. In terms of consumer surplus loss, nine million consumers lose $5 each for a total of $45 million (area a + b + c), while the remaining one million lose a total of $2.5 million (area d).
We can now ask whether a household would be willing to lobby the government to oppose the blue jeans tariff because of the extra cost they would incur. The likely answer is no. For most households, such a small price increase would hardly be noticed. Most consumers do not purchase blue jeans frequently. Also, blue jeans with different styles and brand names typically differ considerably in price. Consumers, who rarely keep track of events affecting particular markets, are unlikely to know that a tariff has even been implemented on the product considered or discussed.
If a person did know of an impending tariff, then presumably $5 is the maximum a household would be willing to pay toward a lobbying effort, since that is the most one can gain if a tariff is prevented. One might argue that if even a fraction of the $5 could be collected from some portion of the ten million consumer households, millions of dollars could be raised to contribute to an opposition lobbying effort. However, collecting small contributions from such a large group would be very difficult to do effectively.
Consider the problems one would face in spearheading a consumer lobbying effort to oppose the blue jeans tariff in this example. A seemingly reasonable plan would be to collect a small amount of money from each household hurt by the tariff and use those funds to pay for a professional lobbying campaign directed at the key decision makers. The first problem faced is how to identify which households are likely to be affected by the tariff. Perhaps many of these households purchased blue jeans last year, but many others may be new to the market in the upcoming year. Finding the right people to solicit money from would be a difficult task.
Even if you could identify them, you would have to find a way to persuade them that they ought to contribute. Time spent talking to each household has an opportunity cost to the household member since that person could be doing something else. Suppose that a person values her time at the hourly wage rate that she earns at her job. If she makes $20 per hour, then you’ll have less than fifteen minutes to convince her to contribute to the lobbying effort since fifteen minutes is worth the $5 you are trying to save for her. The point here is that even learning about the problem is costly for the household. For small savings, a lobbying group will have to convince its contributors very quickly.
Suppose we knew the names and addresses of the ten million affected households. Perhaps we could send a letter to each of them with a stamped return envelope asking to return it with a $2 or $3 contribution to the lobbying effort. With this plan, even purchasing the stamps to mail the envelopes would cost $3,400,000. One would need to get over half of the households to send in $3 each just to cover the cost of the mailing. Recipients of the letters will reasonably question the trustworthiness of the solicitation. Will the money really be put to good use? The chances of getting any more than a small return from this kind of solicitation is highly unlikely.
If contributions can be collected, the lobbying group will face another problem that arises with large groups: free ridership. Free ridingWhen someone enjoys the benefits of something without paying for it, especially when the product is a public good. occurs when someone enjoys the benefits of something without paying for it. The lobbying effort, if successful, will benefit all blue jeans consumers regardless of whether they contributed to the lobbying campaign. In economic terms, we say that the lobbying effort is a public good because individual households cannot be excluded from the benefits of successful lobbying. One of the key problems with public good provision is that individuals may be inclined to free ride—that is, to obtain the benefit without having contributed to its provision. Those who do not contribute also get the added benefit of the full $5 surplus if the lobbying campaign is successful.
The main point of this discussion, though, is that despite the fact that $47.5 million dollars will be lost to consumers of blue jeans if the $5 tariff is implemented, it is very unlikely that this group will be able to form a lobbying campaign to oppose the tariff. Since each household will lose $5 at most, it is extremely unlikely for any reasonable person to spend sufficient time to mount a successful lobbying campaign. Even if one person or group decided to spearhead the effort and collect contributions from others, the difficulties they would face would likely be insurmountable. In the end, government decision makers would probably hear very little in the way of opposition to a proposed tariff.
Many of the arguments are discussed in detail in Mancur Olson’s well-known book The Logic of Collective Action. One of the book’s key points is that large groups are much less effective than small groups in applying effective lobbying pressure on legislators.
Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”