Public Subsidies and Policy Failures: How Subsidies Distort the Natural Environment, Equity and Trade and How to Reform Them. .

• Author: Rivas, Alexandre
• Position: Book Review

BY Cees van Beers and Andre de Moor

Cheltenham, UK: Edward Elgar Publishing Inc. 2001. Pp. xiv, 143. $60.00.

This book studies public subsidies and policy failures. More specifically, it looks at how governments choose to subsidize and how much such subsidies cost society. It also tries to understand why subsidies persist once they fail to serve their purpose and further harm economic, environmental, and social policy objectives. The book is organized in six chapters. The first two chapters, particularly Chapter 2, build the theoretical framework on which the problem will be considered. The remaining chapters are devoted to the analysis of the problem and propositions for subsidy reform policies.

Chapter 2 develops an economic analysis of public subsidies and policy failures on the basis of a standard welfare economics framework with a graphical model that shows the consequences of introducing subsides into a market economy. The effort to build a model involving subsidies is interesting because, as far as I am aware, there are very few, if any, attempts to do so in this manner. However, maybe due to the novelty and the complexity of the issue, the graphical analysis becomes quite difficult to follow because of the excessive number of lines and badly indicated points. Because of these problems, in some cases the match between what is explained in the text and pointed out in the graphics is not clear, weakening the explanatory power of the model.

Chapter 3 investigates the costs and impacts of public subsidies in various sectors of a domestic economy with emphasis on those associated with natural resources, such as agriculture, mining, forestry, fisheries, and energy. The analysis is performed based on figures from OECD and non-OECD countries. The classification and quantifications presented are very important because they help the reader understand how big subsidies are in the world economy and how they affect natural resources, the environment, and welfare as a whole. It is easy to understand that subsidies figures are not very precise due to the different forms in which they are granted. Notwithstanding, the analysis about other costs, such as water externalities, should be more thoroughly developed.

The issue of how governments become addicted to subsidies is developed in Chapter 4. The authors present two kinds of barriers to removing subsidies. One is economic and the other is institutional and political. Among the different arguments...