The Consumer Rip-Off

by | Dec 21, 2005

Since allegations of oil company price-gouging have become topical, let’s look at real price manipulation. Suppose a dairyman wants to sell a gallon of milk for 25 cents less than his competitors, would you want him fined or jailed? Federal Milk Marketing Orders would do just that. Americans pay four times the world price for […]

Since allegations of oil company price-gouging have become topical, let’s look at real price manipulation. Suppose a dairyman wants to sell a gallon of milk for 25 cents less than his competitors, would you want him fined or jailed? Federal Milk Marketing Orders would do just that.

Americans pay four times the world price for sugar as a result of tariffs and quotas on foreign imports. That leads to higher profits and wages in the sugar industry and higher prices for sugar products. Since consumers are far more numerous than businessmen, one might ask how in the world is it politically possible for businessmen to get congress and state legislators to allow them to rip us off?

There’s a phenomenon economists refer to as narrowly dispersed large benefits versus widely dispersed small costs. Take the case of a dairymen association. Members agree to contribute money to lobby federal and state legislators to get the U.S. Department of Agriculture and their state agricultural agencies to enact minimum milk price laws. Since dairy producers have narrow interests and are small in number, compared to dairy consumers, their organization costs are low. Their spending of several million dollars to lobby legislators to mandate minimum milk prices might mean hundreds of millions in higher profits and wages in the dairy industry.

That’s the benefit side, the costs of which are borne by the tens of millions of milk consumers who’re forced to pay maybe $20 or $30 more per year than they’d have to pay if there weren’t congressionally-mandated minimum prices. Which one of us is willing to bear the expenses to go to Washington or state capitols to try to unseat legislators who created the opportunity for the dairy industry to rip us off? Individually, we correctly conclude that it’s cheaper just to pay the $20 or $30 more a year and get on with our lives. Plus, since milk consumers have diverse interests, it’d be costly to organize us to fight the dairy interests and their congressional allies.

It’s a different story with the dairy producers. They will spend the resources to try to unseat a congressman or state legislator who doesn’t do their bidding and vote in favor of statutory minimum milk prices.

Hundreds of millions of dollars are at stake to be divided among a relatively small group of owners and workers. They hire professionals to justify their agenda, among those justifications are: “To preserve the dairy industry,” “to create a level playing field” and incredibly, “to protect the consumer.” Congressmen readily do their bidding because they are well aware that you and I won’t put up much of a fight — we’ll just pay the higher price.

There are hundreds of statutory minimum prices, including gasoline in some states. There are numerous agricultural import restrictions and production quotas. All of these government-sanction market manipulations represent seller collusions against consumers. You say, “Williams, how can that be? The Sherman Antitrust Act gives the U.S. Justice Department and the Federal Trade Commission the power to prosecute and levy fines or imprisonment for price-fixing.” You’re absolutely right. Price-fixing is illegal, and you will face fines or imprisonment, but with one caveat: unless you get permission from congress or your state legislator. If you get permission, price-fixing becomes legal and it’s non-price-fixing that’s illegal.

There’s a little-appreciated fact about collusions. They have a tendency to break down. Why? Because each party to the collusion is alert to the private gains to be made from cheating on the collusive agreement, such as charging a lower price or producing a larger quantity. Collusions need government enforcement in order to work. Part of the unstated mission of some federal agencies in Washington is the enforcement of collusions. That includes the Departments of Commerce, Agriculture, Justice and Labor. One of the surest ways to detect a seller collusion is to see whether there are statutory minimum prices, import restrictions and production quotas.

Walter Williams (March 31, 1936 – December 1, 2020) was an American economist, commentator, academic, and columnist at Capitalism Magazine. He was the John M. Olin Distinguished Professor of Economics at George Mason University, and a syndicated editorialist for Creator's Syndicate. He is author of Race and Economics: How Much Can Be Blamed on Discrimination?, and numerous other works.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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