The Welfare Economics of “Buy Local”

Abstract

AbstractThis paper provides a theoretical model of how various aspects of the “buy local” movement influence social welfare and output across two regions. Market power considerations are also addressed where one region has a competitive advantage in production. While consumers buy local for a variety of reasons, our model categorizes some of the motivations and analyzes the impacts on output under various market structures. Welfare is calculated when demand is changed due to subsidies or taxes. We also allow for the presence of externalities. We find that, in the absence of market power or externalities, deadweight losses occur when the region without a competitive advantage buys more locally. However, in the presence of significant externalities and in the presence of market power, it is possible that profits to producers from consumers buying local could increase more than consumer utility is harmed, thus increasing aggregate social welfare. This could arise if consumers genuinely feel there are sufficient positive externalities from local production or negative externalities from non‐local production to warrant the loss of efficiency. We point out that understanding the motivation behind the movement is critical when analyzing welfare effects since some motivations are counter‐productive to each other.