The Opportunity Costs of Fuel Subsidies

It is unfortunate that the public debate over fuel subsidy removal in Nigeria is, more often than not, confined to the immediate negative impact it would have on the price of goods and services. Although these impacts are real, they fail to communicate the full effects of subsidy.
It was Frédéric Bastiat, a French political economist, who in 1848 posited the principle that any act of economic consequence has not only one, but a series of effects. The first effect is immediate and usually visible. Other effects are invisible, difficult to foresee and emerge only over a period of time. He concluded that confining ourselves to only the visible effects is bad because “it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa”. This principle would eventually be known as the important economic concept of opportunity cost.
When we expend a significant amount of public resources on fuel subsidies without actually lifting people out of poverty, we forego the alternative of using those same resources on interventions that will.
The opportunity cost of subsidies become even more apparent when one considers the huge disparities in fuel consumption patterns between rich and poor. When government subsidizes fuel, it makes a crucial assumption that the few who capture the largest share of direct benefits faithfully and equitably pass them on to indirect beneficiaries who are in the majority. It is the impact of this crucial assumption that we often overlook when evaluating the effects of subsidies.
The fact that the percentage of Nigerians living in poverty continues to rise even though our GDP appears to be growing suggests that our economy is not particularly good at passing on benefits from top to bottom. The structural inefficiencies inherent in our economy imply that most of the benefits of economic growth are captured at the top with very little trickling to the bottom. As a result, top-down economic interventions like subsidies have the unseen impact of widening the gap between the rich and poor.
It follows that even in the absence of corruption, the majority of the benefits of fuel subsidies will never reach the Nigerians who need it the most. And even though the little that trickles down makes a huge difference to Nigeria’s poor, this is only so because of the extreme levels of poverty they endure.
It is in light of this that we urge all levels of Government to engage Nigerians transparently about fuel subsidies with a view to collectively deciding how we can better apply the resources currently being expended on subsidies to lift our citizens out of poverty.
We believe that the majority of Nigerians, if engaged honestly by a morally upright Government, will inevitably support the conclusion that fuel subsidies do more harm than good.


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