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The economic case for organic subsidies: externalities and subsidization

Updated: Jan 25, 2022

To anybody in charge of anything, no matter how complex their job may be, or how ample the extent of their authority, two laws are always evident: inadequate behavior must not be rewarded, and adequate behavior must be rewarded. All rules (from kindergarten play rules to the Penal Code of countries with civil-law legal systems) are forms of rewarding socially adequate behavior and disavowing or even punishing inadequate behavior. When interacting with the market as economic agents, the governments have those same two methods ─ and in markets considered ‘free’, their method of choice is rewarding behavior that is adequate from a public standpoint. The principle is thus simple: if a business is doing good for society (by building infrastructure, educating the young, increasing competitiveness, or even just by creating jobs), the government rewards that good through subsidies. Ideally, at least, government subsidies thus go towards stimulating business activities that bring a public benefit, beyond the private benefit of their profitability.

But our society is far from the ideal, and so government subsidies are not always distributed in the most efficient ways. Sometimes the subsidization is even hidden or ‘obverse’, such as when the government pays to clean up an oil spillage ─ the money is not going directly to the company responsible, but it’s still going towards keeping it profitable by absorbing some of its major costs. Sometimes the government considers that such a company’s existence is too large a benefit to be lost if only because of the impact in the overall economy should that oil company go bankrupt. This is also seen in the agricultural industry, where the government assuming production externalities is a major reason behind the relative cheapness of conventional versus organic products, a major competitive advantage of conventional producers. As a 2020 study found, if governments reverted the cost of just greenhouse gas emissions to agricultural producers, conventionally produced meats, dairy, and plant-based products could see price increases of up to 146%, 91%, and 25%, respectively. Organic produce across those three categories could also see a rise of up to 71%, 40%, and 6% ─ a much smaller increase (though still very large for the consumer), which indicates that organic production systems do not produce as many externalities or already capture a good deal of them in their current pricing structures.

This is a first reason underlying the economic case for organic subsidies: if the externalities of agriculture are something that the government is going to assume in any case (to prevent price increases of the magnitude of the ones suggested above), it should attempt to stimulate the agricultural system that produces the least negative externalities. This doesn’t necessarily mean spending more money ─ it could very well be that ending subsidization of conventional agriculture, while reallocating those funds towards subsidizing organic agriculture, would reduce the money spent on subsidizing agricultural externalities. Saving money on the same service looks pretty good from a governmental standpoint, and could be a first step towards reshaping the agricultural landscape of the world.

Terrace cultivation in an organic farm in Ohio, United States. Soil degradation (a major source of externalities for conventional agricultural systems) is highly reduced in organic agriculture and, with the right practices, leads even to soil improvement.

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