Why Is There Corn in Your Coke?
Coca-cola used to be made with real sugar, but in 1984 the makers of the soft drink replaced sugar with corn syrup. Why did this happen? Part of the reason is because corn syrup became less expensive than sugar. In fact, sugar is nearly twice as expensive in America as in the rest of the world. In this video, Professor Diana Thomas explains why.
United States laws actually limit the amount of sugar imported each year. This limit causes the price of sugar to rise. Such a quota is meant to increase profits of domestic sugar producers and to protect them from foreign competition. The cost to Americans of this quota is a staggering $3 billion each year, in the form of higher prices for sugar and sugar products. But since the cost is split among all citizens, it isn’t worth it to the average American to complain.
In contrast, sugar producers are much in favor of this policy. From 1980 to 1998, each U.S. sugar farmer earned approximately $3 million extra each year because of the quota. The farmers profit generously from this quota, while consumers are made worse off.
How can we prevent some groups of taking advantage of others through laws like sugar quotas? One solution would be to limit what government can do.
Sugar tariffs are sweet for special interests, sour for the rest of us [article]: Art Carden argues that sugar protectionism is “a textbook example of a policy that wastes resources.”
Introduction to Public Choice Theory [article]: An introduction to public choice that reviews the concept of concentrated benefits and dispersed costs
A Six-Point Defense of Farm Subsidies [article]: Alabama Cooperative Extension System’s defense of farm subsidies
How the Government Encourages Obesity: The High Fructose Corn Syrup Story [blog post]: An article focusing on the health and environmental impacts of American corn/sugar policies
Why Do We Pay Agriculture Subsidies [article]: A detailed piece on the allocation of agricultural subsidies to various plants
History of the Sugar Program [article]: A timeline of the economic controls put on sugar from 1789 to 2011
Desert Island Game (game, beginner): Can you learn something about trade and cooperation by being marooned on a desert island?
Trade Ruler (game, advanced): As the Supreme Ruler of an island, you want the country to prosper. By engaging in international trade, you can achieve this goal.
Did you know that Coke used to be made with cane sugar in the U.S., but in 1984, they switched to corn syrup? You might wonder why they made the change. They did it to save money. It turns out that sugar in the U.S. is about twice as expensive as it is in the rest of the world. But why is that? Well it can be explained by a concept economists talk about a lot: concentrated benefits and dispersed costs.
Let me explain. In 1982 President Reagan reimposed a quota on imported sugar. Quotas restrict the amount of a good that can be imported to the U.S., which reduces the supply of sugar and protects domestic producers from foreign competition. When you reduce the supply of sugar with a quota the price rises. That’s simple supply and demand economics. As a result, American consumers pay more for sugar and products that contain sugar than they would without a quota. A Commerce Department study estimated the cost of the quota to consumers at roughly $3 billion a year.
So why would the government put a policy in place that hurts the majority of consumers and voters? Wouldn’t that be political suicide? Actually, no, because the $3 billion cost is very dispersed among the whole population of consumers. Each of us individually pays only about $10 more on sugar products a year, so we don’t even notice it. Most of us have no idea this quota even exists. And even if we do know about it, who’s going to take the time to complain to the government or spend money to lobby to change the law? All that trouble over $10 a year?
Meanwhile the benefits of the quota are very concentrated. Between 1980 and 1998, each American sugar farmer made roughly $3 million a year extra as a result of the quota, so each of them is willing to spend a lot of time and money making sure the law stays that way. They sent lobbyists to DC to talk to politicians because they need the quota to protect them from foreign competition. If the quota were removed, they would lose a lot of money. And some of them might even go out of business.
So from a lawmaker’s perspective you have one side giving you all the reasons why the policy’s so important, arguing we need the jobs or the industry or whatever their case is, and you have another side that hardly speaks up at all. Which way are you going vote? It is pretty obvious.
Concentrated benefits and dispersed costs. This simple concept explains so much of the policymaking and money spending that goes on in Washington. So what can we do to improve accountability and get rid of wasteful spending? Unfortunately, as long as we allow government to make policies that only benefit a certain group, that special interest will have a big incentive to get involved in politics. If we don’t want large agribusiness and other big corporations lobbying for these benefits, the only real answer is to limit what the government can do. More regulation or oversight won’t fix the problem.