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State Aid for Newspapers: First Theoretical Disputes

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State Aid for Newspapers

Part of the book series: Media Business and Innovation ((MEDIA))

Abstract

If one first lays aside any definitional problems—the term state aid is used within the European Union, and the term subsidies the standard expression of the World Trade Organization, while the OECD prefers to use the word support—state aid, at a very fundamental level, commonly refers to a cash payment or financial assistance from a government or other public authority to a person or company. State aid for newspapers, more particularly, usually serves two main purposes: They should reduce a person’s or company’s cost of producing and bringing a commodity to market, and, secondly, by reducing the price of the commodity, should increase its consumption beyond what competitive market forces would provide for.

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Notes

  1. 1.

    Ross argued that to raise welfare of an individual at the lowest possible cost, cash grants are more efficient than subsidies to the consumption of specific commodities (Ross 1988). Equally, Peltzman (1973) looked into education subsidies and found that an in-kind subsidy, such as below-cost education provided by state universities, replaces more private consumption of the subsidized good than an equivalent money subsidy, such as a scholarship.

  2. 2.

    For an overview on financial issues of media management, see, Rizzuto (2006), Ozanich (2006), and Picard (2011).

  3. 3.

    The term subsidy may also refer to assistance granted by other institutions than government, such as individuals or private nongovernmental institutions, although this is more commonly described as charity.

  4. 4.

    Picard (1982, pp. 4–5).

  5. 5.

    Timo Toivonen, researcher at Turku School of Economics in Finland, calculated the value of VAT reductions in three nations and found that VAT reductions for circulation sales in 2010 amounted for by 525 million euros in Germany, 250 million euros in Italy, and 748 million euros in the UK [Toivonen, as cited in Nielsen and Linnebank (2011), pp. 31–32].

  6. 6.

    Gordon Tullock, who originated the idea in 1967, was first to point to the negative externalities through rent-seeking behavior (Tullock 1967).

  7. 7.

    This duopoly game model is inspired by the model of competition used in economics, named after the French mathematician Joseph Louis François Bertrand (1822–1900).

  8. 8.

    If Newspaper B chooses a low price its payoffs is calculated as follows: (1 × 100,000 euros) − (1 × 100,000 euros) = 0. In this competitive pricing scenario, Newspaper A would have to expect the same zero profit payoff in this equilibrium.

  9. 9.

    Of course, this is a stark simplification as, under such conditions, numerous external factors influencing demand, such as population and tastes, and the quality of the newspaper from the point of view of the reader are assumed away.

  10. 10.

    On the upside, incomplete information about vertical quality signaled via price would soften price competition (Daughety and Reinganum 2008).

  11. 11.

    In economic theory, the first fundamental theorem of welfare economics describes an idealized system of equilibrium conditions to efficiently coordinate economic activity (Pareto 1971/1927). Markets that do not achieve this Pareto optimality are said to result in market failure.

  12. 12.

    Arthur Cecil Pigou has been called the father of the market failure paradigm. Indeed, he argued that “in any industry, where there is reason to believe that the free play of self-interest will cause an amount of resources to be invested different from the amount that is required in the best interests of the national dividend, there is a prima facie case for public intervention” (1932, p. 331). He suggested that taxes could be used when external diseconomies are present and that the existence of external economies would warrant the use of subsidies.

  13. 13.

    A PED is easily calculated. For example, if the price of a daily newspaper increases from 1.00 euros to 1.20 euros and the daily sales fall from 500,000 to 250,000, the PED will be –50 % + 20 % = (−) 2.5. The negative sign indicates that P and Q are inversely related, which we would expect for most price/demand relationships. This is significant because the newspaper supplier can calculate or estimate how revenue will be affected by the change in price. In this case, revenue at 1.00 euros is 500,000 euros (1 euros × 500,000) but falls to 300,000 euros after the price rise (1.20 euros × 250,000).

  14. 14.

    If, on the information readily available to them, readers can discriminate between prices but are not able to discover quality and thus will not rationally price trade-off against quality, publishers with high-quality newspapers will be driven out of the market, and there will be a general lowering of standards (Akerlof 1970).

  15. 15.

    Such means are, for example signaling, whereby information is distributed by sellers to buyers by way of quality monitoring systems, whereas “screening” refers to the buyers acquiring information by the help of consumer protection groups. The aim is identical: removing the asymmetry in information.

  16. 16.

    Paul Samuelson (1954) and Richard A. Musgrave (1959) and others consolidated the market failure paradigm in the 1950s. However, this paradigm was contested since its inception.

  17. 17.

    The term was coined in the 1950s to refer to economists teaching in the Economics Department at the University of Chicago, such as Frank Knight, Ronald Coase, and Milton Friedman.

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Murschetz, P. (2013). State Aid for Newspapers: First Theoretical Disputes. In: Murschetz, P. (eds) State Aid for Newspapers. Media Business and Innovation. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-35691-9_2

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