Understanding Economic Equilibrium

CHAPTER 17

The Compensation Principle: Should We Pay the Losers?

Whenever changes are made in economic policy, there are almost always winners and losers. How should we balance those interests?

When we impose tariffs on foreign producers, we help domestic producers of the same goods by allowing them to charge more. That’s a win for those producers. But everyone who buys the product domestically will pay the higher price; they’re the losers in the deal. In general we’re better off engaging in free trade, but whether society is better off for protecting U.S. manufacturers and workers’ jobs than allowing for more competitive pricing is difficult to judge. Gains from tariffs are typically shared by a few producers; the losses, while small case by ...