The Welfare Costs of Tariffs, Monopolies, and Theft

In recent years a considerable number of studies have been published that purport to measure the welfare costs of monopolies and tariffs. The results have uniformly shown very small costs for practices that economists normally deplore. This led Mundell to comment in 1962 that “Unless there is a thorough theoretical re-examination of the validity of the tools upon which these studies are founded someone will inevitably draw the conclusion that economics has ceased to be important.” Judging from conversations with graduate students, a number of younger economists are in fact drawing the conclusion that tariffs and monopolies are not of much importance. This view is now beginning to appear in the literature. On the basis of these measurements Professor Harvey Leibenstein has argued “Microeconomic theory focuses on allocative efficiency to the exclusion of other types of efficiencies that, in fact, are much more significant in many instances.”