The Candy Economy: A Model of Free Exchange

After weeks of costume-planning and anticipation, Halloween is here. Kids work hard on creating elaborate costumes, under the real expectation that those who hand out candy tend to be more generous to those with better costumes. After crafting their costume, kids face a long walk around the neighborhood to collect their candy. These tiny ghosts and goblins expend genuine effort and cost in order to profit on Halloween night.

It is easy to imagine that some kids are far more adept at creating costumes than others. They may come from a wealthier household that can purchase a better costume, have more crafting skills, or just a better imagination! On Halloween, these kids collect more candy at a lower cost than other kids. Let’s refer to these kids as the costumers.

Let’s also imagine that other kids are more inclined to help decorate the house, hanging cobwebs and setting up skeletons. On Halloween, these kids are rewarded for helping out with king-size chocolate bars from their parents. Let’s refer to these kids as the decorators.

Now imagine if the decorators impose a tariff on the costumers with a goal of protecting their candy from the costumers. While the free market price may have been five regular pieces of candy for one king-size chocolate bar, the decorators now charge six regular pieces of candy for one of their precious king-size bars. While the exchange would have happened without a tariff: the costumers would have happily paid five regular pieces of candy for one king-size chocolate bar and any individual decorator would have gladly accepted five regular pieces for one king-size bar, the costumers are not willing to give up six pieces of candy. Under the tariff, fewer kids will trade their candies and each kid is left with a mix of candy that is worse than what they had ended up with in free trade.

While the decorators imposed the tariff trying to protect their best interests and keep their candy for themselves, they end up worse off than if than if they had been able to trade their goods freely. This example may be a simple and silly one, but it contains a spooky message about the cost of limiting free trade.

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