Mass Production

The manufacturing of the same standardized product lines for a

prolonged period
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What is Mass Production?
Mass production is the manufacturing of the same standardized
product lines for a prolonged period. It uses automation or
assembly lines to facilitate the high volume production of
similar products.
Mass production is synonymous with continuous flow
production or series reduction. The concept is identified with
the rise in modern capitalism that succeeded in the Industrial
Revolution. Mass production commonly uses mechanization to
achieve labor division, high volume, monitoring and quality
control, and material flow.
Summary
Mass production is the industrial technique to produce large
quantities of similar products in constant flows on production
lines.
The strategy focuses on low-cost production by using
standardized and repetitive processes to manufacture the same
line of products.
Companies incur a significant investment in terms of time and
money to achieve mass production.
How Mass Production Works
Mass production involves multiple assembly lines, where
various people run routine procedures and do one specific job.
The same equipment is used to perform the identical operation
on a batch of products being manufactured.
For the efficiency of the labor process, companies use
differentiation, formalization, and specialization. The rationale
behind such principles is to keep manufacturing costs low by
using repetitive and standardized processes to produce uniform
products.

The evolution and innovation of sophisticated technologies play

a great role in making manufacturing less complicated. The
large-scale demand for mass-produced products manufactured
at a low cost using a minimal workforce is achieved using
precision machining equipment.

Mass Customization vs. Mass Production

Mass customization involves providing end-users with what
suits their needs at a lower cost. Thus, products that
meaningfully meet customer’s needs are customized on a large
scale. The conventional firms that deal with mass customization
call for flexibility, responsiveness, and the configuration of units,
processes, people, and environments to provide uniquely
customized products that meet user requirements at a
relatively low cost.
Mass customization focuses on markets with fragmented
customer segments and with customer’s preferences being
harder to hypothesize and prone to changes. More intimate
knowledge about end-users and higher profits create a
feedback loop system, which can help companies provide even
better and different products.
In contrast, mass production is the forerunner of mass
customization. Mass production companies replicate a
hierarchical and bureaucratic system where workers perform
repetitive roles that are narrowly defined, resulting in
standardized, low-cost products.
Consumers generally accept standard products under a mass-
production system. On a mass basis, companies manufacturing
goods benefit from economies of scale since it facilitates market
expansion and price reduction. The low product pricing
encourages demand clusters around homogenous products. It
acts as a feedback loop that reinforces standardized products to
the manufacturing firms, given the interplay between
consumers and producers.
However, the two concepts are viewed to be on a continuum of
continuous improvement. A company may also practice mass
customization and mass production, albeit in two different
factories meant for different market segments.
Advantages of Mass Production
1. High precision rate
Mass production can result in a high precision rate if production
is strictly monitored and validated using present parameters.
2. Low production costs
It is also associated with low production costs because
mechanization eliminates redundant job roles, thus requiring
fewer workers.
3. Higher efficiency levels
Additionally, mass production can lead to higher efficiency
levels since automation assembles mass-produced items faster.
It also gives firms a competitive edge and higher profitability
because the rapid assembly helps in the faster distribution and
marketing of products.
Disadvantages of Mass Production
1. Capital-intensive
First, mass production requires automated assembly lines,
which is capital-intensive and requires large sums of
investments to set up and maintain. Only companies with a
large capital outlay can implement mass production in their
manufacturing process.
2. Requires constant upgrades
Second, mass production systems require upgrading and new
improvements to keep up with the latest innovations in the
market. A typical scenario can be seen in a pharmaceutical firm
that manufactures popular drug products on a comprehensive
assembly line. If a different production process is required due
to regulatory changes, the company will be required to incur
significant investment in time and money to adopt a new
assembly line.
3. Low employee morale and increased employee turnover
Lastly, mass production is associated with low employee morale
and increased levels of employee turnover due to the repetitive
nature of the production process.

Real-World Example
An early example of mass production dates back to 1913 when
Henry Ford pioneered the first assembly line technique for his
famous Ford Model T. Ford’s automobiles became available at a
lower price because of the efficiency of the method.
Initially, the assembly lines were segmented to allow each
worker to work on a single step before accelerating the process
using a mechanized belt. It saw the innovative production
approach realize the reduced time it took to build the Model T
automobile from 12 hours to two and a half hours. Automobile
companies still use Ford’s mass production method for rapid
manufacturing.

How Did Mass Production Affect the Price of Consumer Goods?

What Is Mass Production?
Mass production is a set of manufacturing techniques that can
greatly reduce the cost of consumer goods. Before the advent
of assembly lines, standardization, and division of labor, goods
were usually manufactured on a custom basis by skilled
workers.
Once mass production was developed, consumer goods could
be made for the broadest possible market. Anything consumers
needed or desired could be made in larger quantities, and with
lower per-unit costs. Eventually, economies of scale resulted in
lower prices for the consumer without the manufacturer having
to sacrifice profits.
A good example is the difference between factory-produced
garments, compared to clothing that can be made to measure
by a tailor. While clothes that are customized for the wearer
may be a better fit, the services of a skilled tailor will cost much
more than those that are mass-produced. Using modern
assembly-line techniques, a factory of unskilled workers can
produce thousands of identical outfits for a much lower price
than a tailor.

KEY TAKEAWAYS
Mass production enabled manufacturers to produce goods at a
faster pace, distribute those goods more widely, and therefore
increase availability and enable more sales.
Having more products available for sale on a wider basis, versus
products made one-by-one for a specific customer, enabled
manufacturers to ultimately cut costs.
With the impact of economies of scale—cost benefits
companies enjoy when production is at high levels—
manufacturers were able to mass-produce products, cut costs,
and still make a profit.
Henry Ford and the Assembly Line
Industrialization pioneer Henry Ford and his method of
manufacturing motor cars changed everything. While Ford was
not the inventor of the motor car, he is credited with
developing mass production techniques, such as the assembly
line, which have helped reduce production costs.
Instead of manufacturing a few units a month, Ford’s plants
could complete hundreds of cars per day. While only the
wealthy could afford the handmade carriages, cars became the
ultimate consumer product due to affordability that gave
greater mobility to the average American family of the early
part of the 20th century.
This comparison still holds today. Automobile brands such as
Rolls Royce, Maserati, or Lamborghini employ modern-day
craftsmen to create vehicles, making them the equivalent of the
handmade carriages of yesteryear. Meanwhile, Toyota, Ford,
and GM mass-produce cars, making them more affordable to
the average consumer.
The market for high-cost, rare, or even one-of-a-kind items,
such as art or jewelry, remains active, despite the ubiquity of
mass-produced items.

Other products that are handmade rather than mass-produced

and fetch higher prices, sometimes out of the range of the
average consumer, include designer gowns, jewelry, and leather
goods, such as shoes and bags. They have machine-made,
mass-produced counterparts, and purists insist that it takes a
trained eye to spot the difference.
About the only thing that cannot be mass-produced but is still
in demand by collectors would be artwork, such as paintings
and sculptures. While they can be reproduced and mass-
produced, there can only be one original. There is only one
Mona Lisa, but knock-offs can be created by any talented artist
adept at copying the masterpiece.

How Does Mass Production Affect Workers?

Mass production tends to replace highly skilled workers with a
large number of unskilled jobs with lower wages. For example,
skilled woodworkers might go out of business due to the
availability of low-price, mass-produced furniture. This tends to
benefit unskilled workers at the expense of highly-skilled
workers. However, there are also significant health
consequences for workers in factory jobs, especially those
without strong safety standards or pollution controls.
How Does Mass Production Affect Consumers?
On average, mass production tends to benefit consumers by
offering more goods at lower prices. This can be a mixed
blessing if those consumers are also low-wage workers, who
may face precarity as a result of job cuts or layoffs. There are
also health consequences, especially for consumers living near
highly polluting factories.
How Does Mass Production Affect the Environment?
Mass production often relies on industrial manufacturing
techniques that may generate high levels of waste or pollution
at a scale that is difficult to dispose of safely. It also requires
high levels of energy input, requiring the use of fossil fuels. The
increased energy use, combined with the increased
consumption due to lower prices, has the overall effect of
contributing to environmental damage and climate change.
The Bottom Line
Mass production is a set of industrial techniques that allows
large numbers of identical goods to be created relatively
quickly, eliminating the inefficiencies of producing similar goods
by highly skilled laborers. Although there are some downsides,
a significant benefit of mass production is lower prices for
consumer goods.

Mass Production had a massive impact due to the Industrial

Revolution. But even before the development of advanced
machinery, bulk manufacturing did exist. For example, Reuters
recently reported the archaeological discovery of an ancient
brewery.
The ancient brewery had a phenomenal production capacity of
22,400 liters. Such a mammoth quantity forms the basis of bulk
production. This discovery establishes bulk manufacturing as a
5000-year-old concept, tracing back to the Egyptian civilization.
Large-scale manufacturing applies the economies of scale
concept. The perfect balance between human labor and
machinery is attempted. Typically, production tasks are divided
amongst the labor using division of labor. Continued repetitive
tasks help in standardization and specialization, which is
optimize productivity. As a result, the cost is minimized.
To function in an assembly line, the machinery used in large-
scale production is standardized. The parts from one
component are designed to fit into another component easily.
Even when components of an automobile are prepared across
different countries, they can be easily assembled.
Mass Production Example
The meaning of mass production can be better understood with
the assembly line example of a car. The important steps
involved in manufacturing a car are as follows:
Install the engine
Install the hood
Install the wheels
In the traditional method, only one of the steps could be done
at a time. In an assembly line, the work is divided into
specialized workstations. When the engine workstation
completes, the car is passed on to the hood workstation and
finally to the wheel’s workstation.
As a result, three cars are manufactured simultaneously. In an
assembly line, car assembly is split between several stations, all
working simultaneously. When a station is finished with a car, it
passes it on to the next. Thus, three stations can operate on
three cars simultaneously, each at a different assembly stage.
Real-World Application
Among numerous examples of bulk manufacturing, the US
industrialist Henry Ford stands out for his assembly line. Thanks
to the new process, Henry quickly established the Ford Motor
Company. In 1913, he managed to combine division of labor,
cost-effectiveness, and volume production.
With minor updates, the assembly line is still common a century
later. The sheer volume is fascinating; modern assembly lines
manufacture not 100-200 products but a mammoth ten
thousand units a month. Assembly line manufacturing requires
a lot of workforce and machinery.
The mammoth assembly line is broken down to production per
hour. During the industrial revolution, another crucial step of
large-scale production was measuring the time taken by each
worker. Improvements are made at these workflow points. The
objective is to ensure cost-effective smart work.
Synchronization in mass production is the biggest challenge
within any assembly line. It has a lot of moving parts; each
worker has a specialized function working in tandem. A single
flaw will stall the entire assemblage. The margin of error,
therefore, is meager. Assembly lines have fixed targets for every
day, week, and month. Upkeep of the assembly involves
managing the inventory, supply chain, cost, and quality control.
It is also known as flow production, continuous production, and
series production. The automobile industry popularized bulk
manufacturing. It is one of the three main manufacturing
methods along with job production and batch production.
Mass Production Advantages & Disadvantages
Advantages
In addition to cutting costs, bulk manufacturing increases the
overall productivity. According to the New York Times, an
iPhone factory in Central China produces a whopping 500,000
units a day. It involves a total of 400 steps in assembling the
iPhone at a rapid 350 units per minute.
For a high demand product, mass manufacturing gives the
obvious advantage of faster delivery. This directly translates into
less waiting time for the customer.
Bulk production allows the manufacturers to operate at a low-
cost profit margin
. This helps companies survive in competitive markets.
Mass-manufactured products and industries evolve faster. More
units translate into more feedback resulting in faster
improvements.
Uniformity and standardization of processes is another
advantage of large-scale production. Irrespective of the
product, the equipment and workforce employed have to be
uniform. It helps consumers relate with the product or services
which keeps them loyal to the brand.
Disadvantages
It is expensive to start a bulk manufacturing facility, especially
the initial expenditure. It costs millions to acquire and sustain
land, machinery, and labor. Consequently, very few enterprises
can afford large scale production. Hence, most new enterprises
wanting to mass produce are at a disadvantage.
Another disadvantage is that mass production is mass
uniformity in effect. So beyond subtle tweaks, it is difficult to
make changes. In a fast changing world, consumer perception
too changes fast, bulk manufacturing companies are hence at a
disadvantage. They are less flexible. Smaller production units
will find it easier to make massive product changes.
Bulk manufacturing ensures a massive supply, but if not met
with massive demand, it can suddenly turn into a massive loss.
This is known as inventory buildup, another serious large-scale
production disadvantage. Bulk manufacturing companies
therefore are more prone to fluctuations in customer tastes and
preferences.
Frequently Asked Questions (FAQs)
What are the three elements of mass production?
Specialization, standardization of equipment, and the division of
human labor are the three main elements of bulk
manufacturing.
What are the main types of mass production?
Large-scale manufacturing constitutes flow production, job
production, and batch production. In inflow production, the
product is manufactured in an assembly line. Each unit is built
by an individual worker in job production, whereas an entire
batch of goods is manufactured together in batch production.
Why is mass production cheaper?
Bulk manufacturing employs automation and reduces human
labor costs. The assembly line sets its pace and improves the
worker’s efficiency as well.
Globalization and International Trade
Globalization and international trade have become increasingly
significant in today's interconnected world. As countries
become more interconnected through advancements in
technology, communication, and transportation, the global
economy has witnessed a remarkable transformation. This
article explores the concept of globalization, its impact on
international trade, and the benefits and challenges it presents.

Understanding Globalization
Globalization refers to the increasing interconnectedness and
interdependence of countries through the exchange of goods,
services, information, and ideas. It encompasses various
aspects such as economic, social, political, and cultural
integration on a global scale. Globalization has been facilitated
by advancements in technology, particularly in the areas of
transportation and communication, which have significantly
reduced trade barriers and increased global connectivity.
Historical Perspective: Evolution of International Trade
International trade has a long history that can be traced back to
ancient civilizations. From the Silk Road to the Age of Discovery,
trade routes and networks connected different regions of the
world, facilitating the exchange of goods and ideas. Over time,
trade has evolved, and globalization has accelerated the pace
and scale of international trade.
The Impact of Globalization on International Trade
Increased Market Access and Trade Opportunities
Globalization has opened up new markets and expanded trade
opportunities for countries around the world. Reductions in
trade barriers, such as tariffs and quotas, have allowed
businesses to access larger consumer bases and explore new
markets for their products and services. This has led to
increased competition and innovation, benefiting both
producers and consumers.
Expansion of Supply Chains and Outsourcing
Globalization has led to the expansion of global supply chains,
enabling companies to source raw materials, components, and
labor from different countries. This has allowed for increased
efficiency and cost-effectiveness in production processes.
Additionally, outsourcing certain tasks or processes to countries
with comparative advantages has become common, further
driving economic growth and specialization.
Technological Advancements and Communication
Advancements in technology, particularly in the field of
communication, have revolutionized international trade. The
internet, mobile devices, and digital platforms have made it
easier for businesses to connect with customers and partners
worldwide. Instant communication and information exchange
have facilitated cross-border transactions, making international
trade faster and more efficient.
Cultural Exchange and Diversity
Globalization has not only led to the exchange of goods and
services but also to the exchange of cultures and ideas.
Increased interaction between people from different countries
has fostered cultural diversity and understanding. This cultural
exchange has enriched societies and promoted global
cooperation and collaboration.
Benefits of Globalization and International Trade
Economic Growth and Development
Globalization and international trade have been instrumental in
driving economic growth and development. By expanding
markets and increasing trade, countries have the opportunity to
enhance their productivity, create jobs, and attract foreign
investments. Developing countries, in particular, have
experienced significant improvements in their living standards
through increased trade and access to global markets.
Improved Standard of Living
International trade allows consumers to access a wide range of
products and services from around the world. This increased
availability of goods at competitive prices enhances the
standard of living for individuals and promotes consumer
choice. Moreover, trade can lead to the transfer of knowledge
and technology, enabling countries to improve their production
processes and innovate.
Access to a Wide Range of Products and Services
Globalization has made it possible for consumers to access
products and services that were previously unavailable or
expensive. Whether it's exotic foods, luxury goods, or cutting-
edge technologies, international trade has made these items
accessible to a broader consumer base. This has enriched
people's lives and contributed to cultural diversity.
Employment Opportunities
International trade creates employment opportunities across
various sectors. As businesses expand their operations and
reach, they require a skilled workforce to support their growth.
Moreover, export-oriented industries often have a multiplier
effect on job creation, benefiting related industries and the
overall economy.
Challenges and Concerns of Globalization and International
Trade
Economic Inequality and Income Disparities
While globalization has brought numerous benefits, it has also
contributed to economic inequality and income disparities. The
gains from trade have not been distributed equally, leading to a
growing wealth gap between different segments of society. This
has raised concerns about social and economic inequalities
within and between countries.
Environmental Impact and Sustainability
The increased movement of goods and services across borders
has put a strain on the environment. The carbon footprint
associated with long-distance transportation and the
exploitation of natural resources have raised concerns about
sustainability and climate change. Balancing economic growth
with environmental conservation is a significant challenge in the
era of globalization.
Loss of Domestic Industries and Job Displacement
Globalization has led to the relocation of industries from high-
cost countries to low-cost countries, resulting in job
displacement in some regions. Domestic industries that cannot
compete with cheaper imports may face challenges, leading to
unemployment and economic restructuring. This loss of
domestic industries can have social and political implications.
Cultural Homogenization
The increasing influence of global popular culture and the
spread of multinational corporations have raised concerns
about cultural homogenization. Some argue that globalization
has led to the erosion of local cultures and traditions, as global
trends and consumer preferences dominate local markets.
Preserving cultural diversity while embracing globalization is a
delicate balance.
Government Policies and Regulations
Governments play a crucial role in shaping and regulating
international trade. They establish policies, negotiate trade
agreements, and enforce regulations to ensure fair trade
practices and protect national interests. Trade agreements, such
as free trade agreements or customs unions, promote trade
liberalization among participating countries, while tariffs and
trade barriers are used to safeguard domestic industries.
Globalization and International Trade in the Digital Age
The digital age has further accelerated globalization and
transformed international trade. E-commerce platforms have
enabled businesses of all sizes to reach global markets, breaking
down traditional barriers to entry. Cross-border data flows have
become essential for trade in services and the exchange of
information. However, the digital landscape also presents new
challenges, including data privacy and security concerns.
Conclusion
Globalization and international trade have revolutionized the
way countries interact and conduct business. While
globalization has provided numerous benefits, it has also raised
concerns and challenges that need to be addressed.
Governments, businesses, and individuals must work together
to ensure that the benefits of globalization are shared equitably,
while mitigating the negative impacts. By embracing the
opportunities offered by globalization and adopting sound
policies, countries can harness the power of international trade
for sustainable economic growth and development.
What Is a Tariff?
Most countries are limited by their natural resources and ability
to produce certain goods and services. They trade with other
countries to get what their population needs and demands.
However, trade isn't always conducted in an amenable manner
between trading partners. Policies, geopolitics, competition,
and many other factors can make trading partners unhappy.
One of the ways governments deal with trading partners they
disagree with is through tariffs. A tariff is a tax imposed by one
country on the goods and services imported from another
country to influence it, raise revenues, or protect competitive
advantages.
KEY TAKEAWAYS
Governments impose tariffs to raise revenue, protect domestic
industries, or exert political leverage over another country.
Tariffs often result in unwanted side effects, such as higher
consumer prices.
Tariffs have a long and contentious history, and the debate over
whether they represent good or bad policy still rages.
Tariff
Understanding Tariffs
Tariffs are used to restrict imports. Simply put, they increase the
price of goods and services purchased from another country,
making them less attractive to domestic consumers.
A key point to understand is that a tariff affects the exporting
country because consumers in the country that imposed the
tariff might shy away from imports due to the price increase.
However, if the consumer still chooses the imported product,
then the tariff has essentially raised the cost to the consumer in
another country.
There are two types of tariffs:
A specific tariff is levied as a fixed fee based on the type of item,
such as a $500 tariff on a car.
An ad-valorem tariff is levied based on the item's value, such as
5% of an import's value.
Why Governments Impose Tariffs
Governments may impose tariffs for several reasons:
To raise revenues
To protect domestic industries
To protect domestic consumers
To protect national interests
Raising Revenue
Tariffs can be used to raise revenues for governments. This kind
of tariff is called a revenue tariff and is not designed to restrict
imports. For instance, in 2018 and 2019, President Donald
Trump and his administration imposed tariffs on many items to
rebalance the trade deficit. In the fiscal year 2018, customs
duties received were $41.6 billion. In fiscal year 2019, duties
received were $71.9 billion.
Protecting Domestic Industries
Governments can use tariffs to benefit particular industries,
often doing so to protect companies and jobs. For example, in
April 2018, President Donald Trump imposed a 25% ad valorem
tariff on steel articles from all countries except Canada and
Mexico.
In March 2022, President Joe Biden replaced the tariff on steel
products from the United Kingdom with a tariff-rate quota of
500,000 metric tons, and reached quota deals with several
other countries.

This proclamation reopened the trade of specific items with the

U.K. while taking measures to protect domestic U.S. steel
manufacturing and production jobs.
Protecting Domestic Consumers
By making foreign-produced goods more expensive, tariffs can
make domestically produced alternatives seem more attractive.
Some products made in countries with fewer regulations can
harm consumers, such as a product coated in lead-based paint.
Tariffs can make these products so expensive that consumers
won't buy them.
Protecting National Interests
Tariffs can also be used as an extension of foreign policy as their
imposition on a trading partner's main exports may be used to
exert economic leverage. For example, when Russia invaded
Ukraine, much of the world protested by boycotting Russian
goods or imposing sanctions. In April 2022, President Joe Biden
suspended normal trade with Russia. In June, he raised the
tariff on Russian imports not prohibited by the April suspension
to 35%.
Unintended Side Effects of Tariffs
Tariffs can have unintended side effects:
They can make domestic industries less efficient and innovative
by reducing competition.
They can hurt domestic consumers since a lack of competition
tends to push up prices.
They can generate tensions by favoring specific industries or
geographic regions over others. For example, tariffs designed to
help manufacturers in cities may hurt consumers in rural areas
who do not benefit from the policy and are likely to pay more
for manufactured goods.
Finally, an attempt to pressure a rival country by using tariffs
can devolve into an unproductive cycle of retaliation, commonly
known as a trade war.
Advantages and Disadvantages of Tariffs
Pros
Produce revenues
Open negotiations
Support a nation's goals
Make a market predictable
Cons
Created issues between governments
Initiates trade wars

Advantages Explained
Produce revenues: As discussed, tariffs provide a government a
chance to bring in more money. This can relieve some of the tax
burdens felt by a county's citizens and help the government to
reduce deficits.
Open negotiations: Tariffs can be used by countries to open
negotiations for trade or other issues. Each side can use tariffs
to help them create economic policies and talk with trade
partners.
Support a nation's goals: One of the most popular uses for
tariffs is to use them to ensure domestic products receive
preference within a country to support businesses and the
economy.
Make a market predictable: Tariffs can help stabilize a market
and make prices predictable.
Disadvantages Explained
Create issues between governments: Many nations use tariffs to
punish or discourage actions they disapprove of. Unfortunately,
doing this can create tensions between two countries and lead
to more problems.
Initiate trade wars: A typical response for a country with tariffs
imposed on it is to respond similarly, creating a trade war in
which neither country benefits from the other.
History of Tariffs
Pre-Modern Europe
In pre-modern Europe, a nation's wealth was believed to consist
of fixed, tangible assets, such as gold, silver, land, and other
physical resources. Trade was seen as a zero-sum game that
resulted in either a clear net loss or a clear net gain of wealth. If
a country imported more than it exported, a resource, mainly
gold, would flow abroad, thereby draining its wealth. Cross-
border trade was viewed with suspicion, and countries
preferred to acquire colonies with which they could establish
exclusive trading relationships rather than trading with each
other.
This system, known as mercantilism, relied heavily on tariffs and
even outright bans on trade. The colonizing country, which saw
itself as competing with other colonizers, would import raw
materials from its colonies, which were generally barred from
selling their raw materials elsewhere. The colonizing country
would convert the materials into manufactured wares, which it
would sell back to the colonies. High tariffs and other barriers
were implemented to ensure that colonies only purchased
manufactured goods from their home countries.
New Economic Theories
The Scottish economist Adam Smith was one of the first to
question the wisdom of this arrangement. His "Wealth of
Nations" was published in 1776, the same year Britain's
American colonies declared independence in response to high
taxes and restrictive trade arrangements.
Later writers, such as David Ricardo, further developed Smith's
ideas, leading to the theory of comparative advantage. It
maintains that if one country is better at producing a specific
product while another country is better at producing another,
each should devote its resources to the activity at which it
excels. The countries should trade with one another rather than
erect barriers that force them to divert resources toward
activities they do not perform well. According to this theory,
tariffs drag economic growth, even if they can be deployed to
benefit specific narrow sectors under some circumstances.
These two approaches—free trade based on the idea of
comparative advantage, on the one hand, and restricted trade
based on the idea of a zero-sum game, on the other—have
experienced ebbs and flows in popularity.
Late 19th and Early 20th Centuries
Relatively free trade enjoyed a heyday in the late 19th and early
20th centuries when the idea took hold that international
commerce had made large-scale wars between nations so
expensive and counterproductive that they were obsolete.
World War I proved that idea wrong, and nationalist
approaches to trade, including high tariffs, dominated until the
end of World War II.
From that point on, free trade enjoyed a 50-year resurgence,
culminating in the creation in 1995 of the World Trade
Organization (WTO), which acts as an international forum for
settling disputes and laying down ground rules.
Free trade agreements, such as the North American Free Trade
Agreement (NAFTA)—precursor of the United States-Mexico-
Canada Agreement (USMCA)—and the European Union (EU),
also proliferated.
The 2010s
Skepticism of this model—sometimes labeled neoliberalism by
critics who tie it to 19th-century liberal arguments in favor of
free trade—grew, however, and Britain in 2016 voted to leave
the European Union.
That same year Donald Trump won the U.S. presidential
election on a platform that included a call for tariffs on Chinese
and Mexican imports. He implemented tariffs on China when he
took office, but suspended proposed tariffs on Mexico.
Critics of tariff-free multilateral trade deals, who come from
both ends of the political spectrum, argue that they erode
national sovereignty and encourage a race to the bottom
regarding wages, worker protections, and product quality and
standards. Meanwhile, the defenders of such deals counter that
tariffs lead to trade wars, hurt consumers, and hamper
innovation.
What Is the Simple Definition of a Tariff?
A tariff is an extra fee charged on an item by a country that
imports that item.

What Is a Tariff Example?

One of the best-known tariff examples in the U.S. is the tea tax
implemented by the British on the American colonies that led
to the Boston Tea Party.
How Does a Tariff Work?
As an additional charge on an import, a tariff works to reroute a
buyer's intentions and money away from the country exporting
the good.
The Bottom Line
Tariffs have existed in one form or another for centuries.
Trading partners implement them to politically influence a
partner, protect domestic industries and consumers, and
further national goals and interests.
Tariffs are not always negative, regardless of what you might
see on the news. They can be a means to open negotiations
again between trading partners, provide each a chance to voice
concerns, and even help stabilize a country's market.
What Is a Subsidy?
A subsidy is a benefit given to an individual, business, or
institution, usually by the government. It can be direct (such as
cash payments) or indirect (such as tax breaks). The subsidy is
typically given to remove some type of burden, and it is often
considered to be in the overall interest of the public, given to
promote a social good or an economic policy.
KEY TAKEAWAYS
A subsidy is a direct or indirect payment to individuals or firms,
usually in the form of a cash payment from the government or a
targeted tax cut.
In economic theory, subsidies can be used to offset market
failures and externalities to achieve greater economic efficiency.
However, critics of subsidies point to problems with calculating
optimal subsidies, overcoming unseen costs, and preventing
political incentives from making subsidies more burdensome
than they are beneficial.
Subsidy
How a Subsidy Works
A subsidy is generally some form of payment—provided directly
or indirectly—to the receiving individual or business entity.
Subsidies are generally seen as a privileged type of financial aid,
as they lessen an associated burden that was previously levied
against the receiver or promote a particular action by providing
financial support.
Subsidies have an opportunity cost. Consider the Great
Depression-era agricultural subsidy described later in this story:
It had very visible effects, and farmers saw profits rise and hired
more workers. The invisible costs included what would have
happened with all of those dollars without the subsidy. Money
from the subsidies had to be taxed from individual income, and
consumers were hit again when they faced higher food prices at
the grocery store.
Types of Subsidies
A subsidy typically supports particular sectors of a nation’s
economy. It can assist struggling industries by lowering the
burdens placed on them or encourage new developments by
providing financial support for the endeavors. Often, these
areas are not being effectively supported through the actions of
the general economy or may be undercut by activities in rival
economies.

Direct vs. Indirect Subsidies

Direct subsidies are those that involve an actual payment of
funds toward a particular individual, group, or industry. Indirect
subsidies are those that do not hold a predetermined monetary
value or involve actual cash outlays. They can include activities
such as price reductions for required goods or services that can
be government-supported. This allows the needed items to be
purchased below the current market rate, resulting in savings
for those whom the subsidy is designed to help.
Government Subsidies
There are many forms of subsidies given out by the
government. Two of the most common types of individual
subsidies are welfare payments and unemployment benefits.
The objective of these types of subsidies is to help people who
are temporarily suffering economically. Other subsidies, such as
subsidized interest rates on student loans, are given to
encourage people to further their education.
With the enactment of the Affordable Care Act (ACA), some U.S.
families became eligible for subsidies, based on household
income and size. These subsidies are designed to lower the out-
of-pocket costs for insurance premiums. In these instances, the
funds associated with the subsidies are sent directly to the
insurance company to which premiums are due, lowering the
payment amount required from the household.
Subsidies to businesses are given to support an industry that is
struggling against international competition that has lowered
prices, such that the domestic business is not profitable without
the subsidy. Historically, the vast majority of subsidies in the
United States have gone toward four industries: agriculture,
financial institutions, oil companies, and utility companies.
Advantages and Disadvantages of Subsidies
Different rationales exist for the provision of public subsidies.
Some are economic, some are political, and some come from
socioeconomic development theory. Development theory
suggests that some industries need protection from external
competition to maximize domestic benefit.
Technically speaking, a free market economy is free of
subsidies; introducing one transforms it into a mixed economy.
Economists and policymakers often debate the merits of
subsidies and, by extension, the degree to which an economy
should be mixed.
Advantages
Pro-subsidy economists argue that subsidies to particular
industries are vital to helping support businesses and the jobs
that they create. Economists who promote a mixed economy
often argue that subsidies are justifiable to provide the socially
optimal level of goods and services, which will lead to economic
efficiency.
In contemporary neoclassical economic models, there are
circumstances where the actual supply of a good or service falls
below the theoretical equilibrium level—an unwanted shortage,
which creates what economists call a market failure.

One form of correcting this imbalance is to subsidize the good

or service being undersupplied. The subsidy lowers the cost for
the producers to bring the good or service to market. If the
right level of subsidization is provided, all other things being
equal, then the market failure should be corrected.

In other words, according to general equilibrium theory,

subsidies are necessary when a market failure causes too little
production in a specific area. They would theoretically push
production back up to optimal levels.
Some theories of development argue that the governments of
less-developed countries should subsidize domestic industries
in their infancy to protect them from international competition.
This is a popular technique seen in China and various South
American nations at present.
Some say goods or services provide what economists call
positive externalities. A positive externality is achieved
whenever an economic activity provides an indirect benefit to a
third party.
However, because the third party does not directly enter into
the decision, the activity will only occur to the extent that it
directly benefits those directly involved, leaving potential social
gains on the table.
Many subsidies are implemented to encourage activities that
produce positive externalities that might not otherwise be
provided at the socially optimal threshold. The counterpart of
this kind of subsidy is to tax activities that produce negative
externalities.
Disadvantages
Meanwhile, other economists feel free market forces should
determine if a business survives or fails. If it fails, those
resources are allocated to more efficient and profitable use.
They argue that subsidies to these businesses simply sustain an
inefficient allocation of resources.
Free market economists are wary of subsidies for a variety of
reasons. Some argue that subsidies unnecessarily distort
markets, preventing efficient outcomes and diverting resources
from more productive uses to less productive ones.
Similar concerns come from those who suggest that economic
calculation is too inexact and that microeconomic models are
too unrealistic to ever correctly calculate the impact of market
failure. Others suggest that government spending on subsidies
is never as effective as government projections claim it will be.
The costs and unintended consequences of applying subsidies
are rarely worth it, they claim.
Another problem, antagonists point out, is that the act of
subsidizing helps corrupt the political process. According to
political theories of regulatory capture and rent seeking,
subsidies exist as part of an unholy alliance between big
business and the state. Companies often turn to the
government to shield themselves from the competition. In turn,
businesses donate to politicians or promise them benefits after
their political careers.

Even if a subsidy is created with good intentions, without any

conspiracy or self-seeking, it raises the profits of those receiving
beneficial treatment, thus creating an incentive to lobby for its
continuance, even after the need or its usefulness runs out. This
potentially allows political and business interests to create a
mutual benefit at the expense of taxpayers and/or competitive
firms or industries.

The Politics of Subsidies

There are a few different ways to evaluate the success of
government subsidies. Most economists consider a subsidy a
failure if it fails to improve the overall economy. However,
policymakers might still consider it a success if it helps achieve a
different objective. Most subsidies are long-term failures in the
economic sense but still achieve cultural or political goals.
An example of these competing evaluations could be seen in
the Great Depression. Presidents Herbert Hoover and Franklin
D. Roosevelt both set price floors on agricultural products and
paid farmers to not produce. Their policy goal was to stop food
prices from falling and to protect small farmers. To this extent,
the subsidy was a success.
But the economic effect was quite different. Artificially high
food prices lowered the standard of living for consumers and
forced people to spend more on food than they otherwise
would have. Those outside of the farm industry were worse off
in absolute economic terms.
Sometimes subsidies may appear to have run their course or
continue to create an artificial market, but there are other
factors that keep them in place. Production subsidies by G-20
countries averaged $290 billion per year from 2017 to 2019,
with 95% going toward oil and gas. Meanwhile, 2019 global
consumption subsidies were $320 billion, driven largely by oil
and gas.
The combination of production and consumption subsidies in
the oil and gas industry creates overconsumption by artificially
lowering the price of fossil fuels; however, these subsidies (on
both the production and consumption sides) have lots of
political and systemic support and pushback from consumer
and energy companies that would be impacted if reform did
happen.
In terms of a pragmatic political economy, a subsidy is
successful from the point of view of its proponents if it
succeeds in transferring wealth to its beneficiaries and
contributing to the reelection of its political backers.

The strongest advocates of subsidies tend to be those who

directly or indirectly gain from them, and the political incentive
to “bring home the bacon” to secure support from special
interests is a powerful lure for politicians and policymakers.

What Is the Difference Between Direct and Indirect Subsidies?

Direct subsidies are those that involve an actual payment of
funds toward a particular individual, group, or industry. Indirect
subsidies are those that do not hold a predetermined monetary
value or involve actual cash outlays. These can include activities
such as price reductions for required goods or services that can
be government-supported.

What Is the Position of Subsidy Advocates?

Subsidies exist in mixed economies. Proponents argue that
subsidies to particular industries are vital to helping support
businesses and the jobs that they create. Proponents further
contend that subsidies are justifiable to provide the socially
optimal level of goods and services, which will lead to economic
efficiency.

What Is the Position of Subsidy Opponents?

Technically speaking, a free market economy is free of
subsidies. Subsidy opponents feel free market forces should
determine if a business survives or fails. If it fails, those
resources will be allocated to more efficient and profitable use.
Opponents argue that subsidies unnecessarily distort markets,
preventing efficient outcomes as resources are diverted from
more productive uses to less productive ones.

The Bottom Line

A subsidy given to an individual, business, or institution—
usually by the government—can be direct or indirect. They can
assist struggling industries, encourage new developments, and
promote a social good or policy. Sometimes by helping one
sector or group in the economy, they hurt another group, such
as a subsidy that helps farmers but increases food prices for
consumers. Or they can fail economically but achieve cultural or
political go