Thursday, August 20, 2009

How Much Should You Pay for that Chocolate Bar?

Have you heard about this economic news? Can you imagine our beloved, sweet-tooth-curing, sugary snacks becoming more expensive?

The story describes a bit of a political standoff between some of the major American food manufacturers and the United States government. Companies, such as Hershey and Kraft, want the government to increase sugar import quotas. This would allow more foreign-made sugar to be imported into the United States (it is important to note that the U.S. already imports a hefty amount of sugar from Mexico, but there is no quota, due to NAFTA). The result would be greater competition and lower prices on sugar.

More importantly, this story is a great tie-in to my earlier post, "The Economics of Price Gouging." It also relates directly to Mike's February post called, "Buy American."

In particular, the sugar quota, just like any trade quota or tariff imposed by a government, represents a PRICE FLOOR. In essence, what the government has done is created an artificial, minimum price that is above the equilibrium price of the sugar market. Now, the government didn't set a specific price, but the current quota limits the amount of sugar suppliers available to Hershey, Kraft, and the like, and keeps the price at a level greater than what the food manufacturers and confectioners would normally pay in a free market. the domestic sugar price has no chance of coming down because government has restricted competition.

Now, the argument used by food manufacturers and confectioners, is that there is a shortage of sugar, due to the quota system. This is faulty economic thinking. Sugar manufacturers were quick to point out that there is plenty of American sugar to buy. OF COURSE THERE IS! Government has created a market where prices are artificially high. The suppliers who CAN benefit from those high prices are quick to supply more sugar.

The problem is NOT a SHORTAGE of sugar. The problem IS that GOVERNMENT is keeping prices at a level that Hershey and Kraft don't want to pay.

  • For what reason? To protect American sugar producers.
  • Who pays the price? We do, with higher prices at the grocery store cash register.

1 comment:

  1. Companies like Hershey and Kraft are forced to stretch the truth in order to try and sway public and policitical opinion about how their businesses are impacted by sugar import quotas. Why? Because the sugar manufacturers seem to be doing a better job of lobbying. Shame on us: both parties are assuming most people won't understand the economic argument.