International Trade Theory and Policy
by Steven M. Suranovic

Trade 105-4

The Consumers' Lobbying Decision

If the $5 tariff is implemented, it will raise the price from $30 to $35. Consumption will fall from 10 million to 9 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 money to buy something else they think is more valuable than jeans for $35. The other 9 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, 9 million consumers lose $5 each for a total of $45 million (area a + b + c)while the remaining 1 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 towards a lobbying effort, since that is the most one can gain if a tariff is prevented. One might argue that if even a quarter of that could be collected from 10 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, if not impossible, to do effectively. Many of the reasons are discussed in detail in Mancur Olson's well-known book, "The Logic of Collective Action." One of the key points made is that large groups are much less effective than small groups in applying effective lobbying pressure on legislators.

Consider the problems one would face in spearheading a consumer lobbying effort to oppose a 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 the ones 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 their time at the hourly wage rate that they earn at their job. If the person makes $20 per hour then you'll have less than 15 minutes to convince the person to contribute to the lobbying effort since 15 minutes is worth the $5 you are trying to save for the person. 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 10 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 the costs of 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 costs 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 riding occurs when someone enjoys the benefits of something without paying for it. The lobbying effort, if successful, will benefit all blue jean consumers regardless whether they contribute to the lobbying campaign or not. 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, 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 there is $47.5 million dollars that will be lost to consumers of blue jeans if the $5 tariff is implemented, it is very unlikely that this group would be able to form a lobbying campaign to oppose the tariff. Since each household will lose, at most, $5, 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.

International Trade Theory and Policy - Chapter 105-4: Last Updated on 3/3/01