Summer is near, and soon we will all be thirsting for cold drinks to beat the heat. If you want to add a little more sugar to your iced tea, lemonade or other summer favorite, call the government: It looks as if there will be plenty of sugar to pass around.
As reported by The Wall Street Journal last month, the U.S. Department of Agriculture plans to buy 400,000 tons of sugar from domestic producers this year, including Idaho's own Amalgamated Sugar Co. The USDA action is part of federal price supports and subsidies for the industry that date back to the early 1930s.
A big part of the USDA price-support program is a quota system limiting how much can be imported from other sugar-producing countries.
Mexican producers can export an unlimited amount of sugar to the United States under the North American Free Trade Agreement, but sugar from other big sources, such as Brazil, is restricted.
The USDA estimates that imports of Mexican sugar make up about 11 percent of the U.S. market.
Economists analyze international trade issues with a model of how the allocation of resources affects the well-being of participants in a market.
This so-called welfare economics looks at whether prices and quantities in a market are the best possible solution to the resource allocation problem. That is, when supply and demand are balanced, does the outcome maximize welfare?
Welfare economics shows that tariffs and quotas on the international trade of goods and services reduce welfare.
A tariff, or tax on the quantity imported, limits the quantity produced abroad and sold here, raising prices for consumers.
As the price of any good affected by the tariff rises, the domestic quantity demanded will fall and the domestic quantity supplied will be higher than it would be otherwise. Tariffs have the net effect of making domestic producers better off and domestic consumers worse off.
An import quota acts just like a tariff, limiting the quantity of a good that can be produced abroad and sold domestically.
Both tariffs and quotas raise the domestic price of the good, reducing the welfare of domestic consumers and increasing the welfare of domestic producers.
However, a tariff raises revenue for the government, while a quota creates a surplus for license holders. Overall, quotas create larger losses than tariffs, because the import licenses under the quota system are often given away.
Under the standard model of welfare economics, the gains to producers from tariffs and quotas outweigh the losses to consumers. Such is the case today for sugar.
According to prices on the Intercontinental Exchange, the current world price for sugar is about $18 per hundred pounds, while the U.S. price is about $1.25 higher.
U.S. consumers of any sugar-based product are paying more despite increasing world production and overall declining prices. USDA data show that world prices have fallen nearly 40 percent since their peak in early 2011.
If U.S. sugar producers were not operating under the USDA price support program, they would respond to declining world prices by reducing supply. But instead, the government will now likely buy the excess production and sell it to ethanol producers at a loss.
The sugar support program may protect U.S. production, but not without a high cost. A 2011 study by researchers at Iowa State University estimates a $2.9 billion to $3.5 billion annual cost to consumers from the program.
The American Sugar Association claims the U.S. sugar industry supports jobs for 142,000 workers. Therefore, the cost to consumers looks to be around an extra $20,000 or more per job.
So enjoy summer and all the sweet drinks. We're paying dearly for them.