This is “The Producers’ Lobbying Decision”, section 10.5 from the book Policy and Theory of International Trade (v. 1.0). For details on it (including licensing), click here.

For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (19 MB) or just this chapter (251 KB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).

Has this book helped you? Consider passing it on:
Creative Commons supports free culture from music to education. Their licenses helped make this book available to you.
DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators.

10.5 The Producers’ Lobbying Decision

Learning Objective

  1. Learn the lobbying implications of the concentrated benefits of protection to producer interests.

On the producers’ side, let’s assume that there are thirty-five separate, and equally sized, firms. If a $5 tariff is implemented, producers as a group would gain $35 million in producer surplus. That means each firm stands to gain $1 million. Domestic producers would also supply two million additional pairs of jeans, and that would require expansion of the industry labor force. Clearly, the tariff would be beneficial to the firm owners and to industry workers. The potential to expand production, add workers, and increase profits by $1 million per firm will provide a strong motivation to participate in a lobbying effort. In the case of the firms, however, organization of a lobbying effort will be much easier than the opposing effort by consumers.

First of all, the $1 million surplus accruing to each firm is pure gravy. Payments to workers and other factors are not a part of the $1 million additional surplus; thus it is money over and above the marginal costs of additional production. For this reason, profit received in this manner is often referred to as “economic rents.” Since the rents are concentrated in a small number of firms, with $1 million going to each, each firm will have a strong incentive to participate in a lobbying campaign. But who’s going to spearhead the effort?

Organization of a lobbying campaign will probably be easier for firms than for consumers. First, the industry may have an industry association that maintains continual links with policymakers in state and federal governments. The workers in the industry might also belong to a trade union, which would also have interests in supporting a lobbying effort. Or a few of the industry leaders could take it upon themselves to begin the effort (although that is assumed away in the example). Second, as a smaller group, it is easy to identify the likely beneficiaries from the tariff and to solicit contributions. The lobbying group should easily be able to collect millions of dollars to support an extensive lobbying effort. A mere contribution of $50,000 per firm would generate $1.75 million that could be used to hire a professional lobbying team. Even if the chances of a successful outcome are small, it may still be practical for the firms to contribute to a lobbying effort. The return on that $50,000 “investment” would be $1 million if successful. That’s a 2,000 percent rate of return—much higher than any brick-and-mortar investment project that might be considered. Free riding would also be less likely to occur since with only thirty-five firms to keep track of, contributors would probably learn who is not participating. Nonparticipation would establish a poor reputation for a firm and could have unpleasant consequences in its future industry association dealings.

With a well-financed lobbying effort, it would not be difficult to make decision makers aware that there is resounding support for the tariff within the industry community. Newspaper and television ads could be purchased to raise public awareness. Interested parties could be flown to the capitol to speak with key decision makers. In this way, the chances of obtaining the tariff may be increased substantially.

The Mancur Olson result applies in reverse to small groups. Small groups are much more effective than large groups in applying effective lobbying pressure on legislators.

Key Takeaways

  • Although the increase in producer surplus is a small welfare effect in the example, because the number of producers affected is relatively small, the effect of the tariff on each producer is relatively large.
  • Because a small number of producers are affected to a sizeable degree, it is easy to identify who is positively affected by the tariff.
  • Because the per-producer benefit of the tariff is high, firm lobbying efforts to promote the tariff will likely be a worthwhile investment.
  • Small groups are much more effective than large groups in applying effective lobbying pressure on legislators.

Exercise

  1. 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?”

    1. Of concentrated or dispersed, this is how to describe the typical benefits that accrue to producers because of an import tariff.
    2. The amount of money gained by each producer of coffee due to a $0.25 tariff if $20 million is gained in producer surplus in a market of twenty producing firms.
    3. The rate of return on a $50,000 lobbying expense if that lobbying results in a $0.30 tariff on coffee and nets the firm an additional $3,000,000 in profit.
    4. Of consumer groups or producer groups, this group is more likely to form an effective lobby.