Tuesday, November 18, 2014

Subsidizing city farms is not a good use of resources

This past weekend I attended the 2014 North American Regional Science Conference in Bethesda, MD. At the conference one attendee presented some research they had done on local and state urban farming policy. Apparently many states and municipalities are subsidizing urban farms, gardens, and farmers markets in an effort to get more healthy food to city residents. Cleveland is one city that is taking part in this trend and getting subsidies from the federal and state government.

I am all for allowing people to use their land how they see fit. I think that if neighborhoods want to start gardens and local farms on unused lots they should not be prevented from doing so by any rules or regulations. However, I don't think that those lots should be specially zoned for farming or that people who want to use them for farming should get any special treatment. Getting rid of silly rules that prevent farming from occurring is a good thing, but promoting farming over other productive uses is wasteful.

The reason it is wasteful is because of comparative advantage. Having a comparative advantage means that you can produce something at a lower opportunity cost than someone else. In the case of farming, rural areas have a comparative advantage over cities because the land used for farming in a city usually has a more productive use than it does in a rural area. For example, let's compare Franklin county Ohio, where Columbus is located, to a nearby rural county, Logan county. Below are the production possibility frontiers (PPF) for both areas. F stands for financial services and the dollar value produced per hour is on the Y axis. A stands for agricultural output and the dollar value produced per hour is on the X axis.

Notice that Franklin county can produce $300/hr of financial services compared to $50/hr in Logan county. Franklin county has an absolute advantage in financial services. If you have ever been to Columbus this make sense. Cities often have agglomeration economies in white collar work due to the lower cost of transferring ideas and information, which makes workers more productive than they are in rural areas. Columbus has several major banks located in it's borders and this makes financial service workers more productive. Both Franklin and Logan can produce $100/hr in agricultural production, so neither has a comparative advantage in A (I could have chose a higher number for Logan but the analysis would be unchanged). 

The opportunity cost of producing another dollar of A in Columbus is $3 of F ($300F = $100A reduces to $3F = $1A). The opportunity cost of producing another dollar of A in Logan is only $0.50 (50F = 100A so 0.5F = 1A) This means that Logan has a comparative advantage in A since they give up less F to produce another dollar of A. Franklin has a comparative advantage in F (1F = 0.33A vs. 1F = 2A). Franklin gives up less A to produce another dollar of F. In this case Logan should specialize in A and Franklin should specialize in F and the two economies should trade with one another. Specialization and trade maximizes production due to the different comparative advantages.

For example, one terms of trade could be $1A = $2F. Franklin, who is specializing in F, would agree with this because if they want to produce another A on their own (called autarky) they have to give up 3 F. With trade they only give up 2. Logan, who is specializing in A, would agree with this because if they wanted 2 more F on their own they would have to give up 4 A. With trade they only give up 1. So both countries can get the good that they don't specialize in cheaper with trade. This is how trade creates value and makes us all better off.

Now suppose the politicians in Ohio decide to subsidize A in Franklin county so that they can be "self sufficient" and "understand where food comes from" and "eat healthier". They do this by taxing another region, like Greene county, and then using those tax dollars (i.e. resources) to subsidize the production of A in Franklin county. If they subsidize it enough, they can eliminate the gains from trade. For example, suppose the subsidies allow Franklin county to increase their production of A to $600/hr. Their new PPF is:

Now the opportunity cost of A is the same in both Franklin and Logan county. The gains from trade between the two have been eliminated. Franklin county can grow their own food, hurrah! But remember that to do this Franklin county needed a subsidy, which can only be raised by taxing some other area. So resources have to be moved from one area to another by the government tax apparatus to make Franklin county as efficient as Logan county in A.

That is what urban farming policy does; it attempts to increase the productivity of urban farms so that it makes economic sense to grow their own food rather than import it from rural areas. This is a waste of resources. Specialization and trade make us rich. The government should not try to create industries or pick winners and losers. If an abandoned lot in Cleveland is put to its highest valued use as a farm then so be it. But if its highest valued use is as a bank, or convenience store, or bar, or bicycle shop then that is what it should be. Government subsidies distort markets and lead to inefficient allocations of resources. Urban farm policy is just one example of this activity that occurs far too often.

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