Tariff pass-through to consumers and monopoly prices
‘Hey, bro! I’m writing to you in the hope that you’ll find some elegant solution to our problem. You probably already know that for the third year now, once a quarter a gang of mafiosi come to our factory and take about half of all our proceeds and production stocks. In addition, they regularly take a portion of the wages we pay our workers.
Do you think we can pass on some of our losses to our customers? Yes, we are aware that the bulk of our customers are also vulnerable to such raids and don’t have extra money. But maybe that’s the solution? You’re an economist with a university degree. Give us your advice, please!‘
A: ‘Try it’
—
Hi!
I realised with some surprise that even in such a seemingly – enlightened – sub, a great many participants believe that the price of goods depends on costs: wages, land, taxes, interest and the like.
Many people here believe that prices can rise for the sole reason that the wages of workers in an enterprise rise, although the Austrian school argues exactly the opposite: wages rise because the demand for the enterprise’s output rises. They believe, like the Marxists, that it is not the demand for vegetables that determines the price of land, but that rising land prices force farmers to raise the price of vegetables.
Not surprisingly, some ‘Austrians’ readily allow the broadest exceptions to the law of ‘supply and demand’, claiming that this law is just an old, silly law from a first-year university programme and that it no longer reflects reality. The belief that ‘producers are able to pass on tax costs to consumers’ is also unsurprising. It is said that there is even some kind of study that supposedly proved that producers are able to shift up to 80% of the tax cost to consumers! I think that if there is such a study, it is just the usual mainstream nonsense dressed up in a scientific form.
Ladies and gentlemen, come to your senses!
This is all Marxist nonsense designed to justify tax increases. It is misleading the public to divert attention from the fact that taxes benefit only the government bureaucracy. It’s shifting the blame for poverty from the bureaucracy to ‘greedy corporations’.
It is also a logical error any verbal equilibristics with the use of the words ‘price elasticity of demand’, which supposedly allow to transfer tax costs to the buyer. This error simply hides the fact that a monopolist somewhere had the opportunity to set a monopoly price. But even in this case the monopolist manipulates not the price but the volume of supply in order to maximise profit.
‘If the circumstances are such that a monopolist is able to secure higher net revenues by selling fewer of his products at a higher price than by selling more of them at a lower price, then a monopoly price arises, higher than the market price would be in the absence of monopoly. It is monopoly prices that act as a significant market phenomenon, while monopoly as such is only important if it can lead to the formation of monopoly prices‘
– Ludwig von Mises (not literally), Human action
But no monopolist, with the exception of the state, can raise the price indefinitely, because it will either make them switch to substitutes or, in a vital situation, simply break their heads. The only monopolist who can afford all this is the state. However, it has already played too much with monopoly on money (see ‘bitcoin’, etc.).
Let me remind you of the basic corollaries of the law of ‘supply and demand’ in the context of Trump’s imposition of tariffs:
So, the introduction of tariffs leads to higher costs for producers. In this case – Chinese producers. It is impossible to include the growth of tax costs of producers in a competitive market in the price. If it was possible, the producer would have done it earlier. But he did not do it precisely for the reason that he cannot. As soon as he raises the price, he will immediately find himself at a different, more left-wing price/volume point, if we look at the graph of the imaginary demand curve, and the vacated niche will be occupied by a competitor. That is, it is not at all certain that a smaller volume will allow at least to maintain profit. Let us add: the elasticity of demand (at price) does not matter here for exactly the same reasons: if there was an opportunity to raise the price (taking into account the elasticity of demand), the producer would have raised it even before the tax was introduced.
What happens in reality?
Rising costs lead to lower profits for producers because some of the profits are now passed on to the American bureaucracy. Because of this, Chinese capitalists simply withdraw some capital from the industries affected by the tariff and allocate capital to other industries with higher returns. As a consequence, Chinese producers subject to the tariff are forced to reduce production.
In addition, some Chinese producers who were barely making ends meet before the tariffs were imposed (so-called ‘marginal producers’) are simply going bankrupt or stopping production. This further reduces the supply of goods.
As a result, we get a general reduction in supply, which, according to the law of ‘supply demand’ and leads to an increase in price. It is this price increase that is mistaken by those who skipped lectures in the first year of university as ‘shifting tax costs from the producer to the consumer’.
Describing this situation we can also say that: ‘Consumers didn’t start paying more. They just started eating less. For the sole reason that DC has started eating even more.’ Something like that….
Will it help American manufacturers? Hardly. It will only do them a disservice. The Russians call such aid ‘American aid,’ i.e., aid that worsens the situation of the one being helped.
The fact is that American companies are being displaced by Chinese companies not because Chinese companies, other things being equal, are able to perform better. The problem is that the ‘other things being equal’ condition is not being met. American companies have a much higher tax burden and are more heavily regulated than Chinese companies. Therefore, the only true condition for their revival would be to reduce the tax and regulatory burden to at least the level of China.
Yes, those U.S. companies whose products are protected by the tariff will sell more than they did before the tariff was imposed. And perhaps even more profitable than before the tariff was imposed. But other American industries will suffer, as American (and Chinese!) capitalists will start to withdraw capital from them in order to inject it into the industries protected by the tariff. We can’t tell you exactly which industries will be affected. We can only say for sure that the first to suffer will be those industries that use the Chinese imports that will be subject to the tariff (see current stock quotes).
This movement of capital will lead to a reduction in supply, and thus to higher prices in completely unexpected sectors. Consumers will eat less again.
That’s it, I’ve finished my report.
P.S.
I don’t think Trump will raise tariffs. I think all this media noise is just standard haka before the usual negotiations to get export/import bonuses for companies affiliated with the team of newly appointed bureaucrats.
submitted by /u/ledoscreen
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