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Thursday, May 13, 2010

Subsidy as Economic Illusion

@james_randerson @guardian_clark and @TimHarford debate whether nuclear power can survive without subsidy.

@james_randerson picks up a statement by Chris Huhne, the new Energy Secretary, saying there will be no new nukes without government subsidy [Guardian 13 May 2010]. Surely that means no nukes, concludes James. But as @TimHarford points out, the question depends (among other things) on the carbon price. To the extent that the energy market is already distorted by a wide range of government initiatives, the concept of subsidy is not as simple as the politicians might wish.

More generally, the notion of subsidy is an accounting convention, and depends critically on how you frame the systems of interest. During the 1984 UK miners' strike, there was a fiercely political debate about the economic viability of the pits. The two sides in the dispute (NCB and NUM) adopted broadly similar styles of argument, but came to opposite conclusions simply because they chose to scope the cost-benefit analysis differently.

In housing, the notion of "subsidized housing" commonly refers to cheaper accommodation for people with low to moderate incomes, provided with financial support from government or charity. But as Malcolm Rigg pointed out at the PSI conference yesterday, mortgage tax relief can be regarded as a form of subsidy affecting (and arguably distorting) all parts of the housing market, including owner-occupation and private rental (including buy-to-rent).

Talking about subsidies creates the illusion that there is a flow of money or other resources from A to B. But these flows are an emergent property of a particular economic or business model. And as system theory should remind us, the model is not the reality.

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