The Economics of the Massachusetts Film Industry Essay

Individuals who are employed under the film industry have always been known to be high income earners. in fact, most, if not all coverage by the media of actors and actresses, as well as directors, producers, and others belonging to the industry are not only the highest paid with respect to salaries but also with respect to popularity (Office & Group).

However, the film industry of a certain location does not only benefit the people who directly gain in income as the ones that we have already mentioned above. Rather, there is an additional kind of revenue that is channeled from such an industry. In economics, government plays an essential part in the development of a certain location. However, in order for a local government to able to do his duties such as the correction of market failures, it must first be able to gain income from its various sources. And for any government, the main income eventually would come from taxes that are collected from individuals, firms, and enterprises.

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The first question that this paper addresses is that should Massachusetts keep its Hollywood subsidy? There are two analytical approaches that we could make from such a topic. First is taken from the business point of view, the second is from a theoretical point of view on the economic analysis of subsidies.

With respect to the first approach, the answer would be a definite yes. A subsidy, or a monetary help that is provided by the national or local government, are readily accepted by businesses has it either reduces the costs of their operation or increases their revenues — which is basically the same thing when approached from an accounting standpoint (Massachusetts & Revenue, 2008). However, it is the second analysis which is more interesting — that of the point of view of theoretical economics.

As we have discovered in our research, it might be surprising for individuals to realize that economists are not in favor of subsidies. For economists, subsidies negative effects for they do not allow industries to follow the path of free markets. According to economists, any distortion within an industry that is directly generated by policies created by a government would eventually lead to inefficiencies within that set industry (OECD & O. F. E. C. A. Development, 2006). A subsidy is a form of such price control mechanisms and the overall result, according to the research that we have done, is that a subsidy within a given industry would result in other related industries and other locations to have better innovations because of the lack of competition. For example, and economic subsidy on a single good would cause the producers of that good to be complacent to the kind of productive technology they make (Harriss, Taxation, & R. A. E. Development, 1973). Relating it to the Hollywood subsidy to the Massachusetts film industry, if Hollywood continues to subsidize that set location, then other states — the film industry of these other locations — would, according to economists, improved much farther end technologically developed much faster than that of Massachusetts because of the distortions in the price. However, for the moment, or if we look at it from the point of view of economists, the short run market of the film industry in Massachusetts, this is definitely beneficial (Harriss et al., 1973).

The next topic that we would like to discuss in this paper is to analyze how the state’s film industry tax incentives might help grow employment, skills, and other businesses within the cluster of the film industry. Again, in order to analyze this, we draw from incentives and labor economic theories. According to this discipline, labor and other markets that are highly intensive labor react strongly to the incentives that are delivered to them. In the case of the film industry and the tax incentives, since it would be of a lower cost to participate in this industry because of the se (Office & Group)t incentives, more labor and the elements that go with it would shift towards this industry. As a conceptual example, imagine a laborer choosing between working as a mechanic in one industry and as a cameraman and the Massachusetts film industry. We further assume that initially, the salaries are the same. Labor economic theory claims that holding other things constant, that individual would have no preference and could choose among either of the two to work with. However, when a tax incentive is given to the film industry, this would mean that there would be a lower cost for the industry and a higher revenue margin — eventually meaning that the salary of the cameraman would be higher, resulting in labor moving towards that location. This is the basic argument by economists on why an industry tax incentive on a certain location would eventually grow employment. Also, if we look at the point of view of how such human resources would develop skills, economists have a concept of economies of scale through industry agglomeration. What this means is that if certain elements within a production market are focused in one geographic location, there is a high probability that their skills would increase at a faster rate than when they were separated because of elements such as knowledge spillovers, knowledge sharing, focused learning, and the like (Booth, 1995). Research has been made comparing the performance of students which are located in a single classroom, and the performance of students who took their classes online. The result was that the students who were in a classroom had statistically higher grades than those working online. He reasoned that is pointed out by the research is that although learning is a function of individual knowledge accumulation, focusing on a single location eventually had spillovers and knowledge sharing effects.

This is also the case for businesses in a certain location. The primary reason why there are central business districts in countries — such as New York City for banks, Washington for politics, and many others like it — is because transportation and transaction costs significantly decreased when individuals are geographically located closer to one another. High tax incentives for the Massachusetts film industry would result in people accumulating in Massachusetts if their market and industry is related to film and entertainment. As a result, businesses focusing and addressing the specific need would also move in that certain location in order to address the needs of that market. As a result, the income of the state would significantly rise.

In looking at the various research we have gathered, we have discovered that film industries in other countries are more highly supported than those found in the United States (Massachusetts & Revenue, 2008). Initially, this might seem highly negative if we do not apply in economic analysis of such an event. However, in drawing from standard concept of trade theory in economics, we will come to see otherwise.

Trade theory — or neoclassical economic trade theory if we are to use its formal name and its use in the academic community — says that an industry receiving special support from any government would result in short run games but long run losses. Before the 1940s, trade theory was more towards government support for industries in order to be competitive in other countries. This is basically the beginning of the import substitution industrialization concept in development economics (Naqvi, 1993). However, as had been discovered by economists, although it was beneficial for these countries and industries to have support from the government in the short run, the long-run effect was detrimental because of the fact that these countries did not need to innovate and increase their technology and productive capacity because they had false comparative advantage and industry (Ghatak, 2003). On the other hand, countries where in the industries were not supported for the government, because of other competition in other countries, and even competition from those countries which have government support to import substitution industrialization, developed fast because competition breeds innovation and increasing the production frontier of firms. If we are to look at it from the film industry of Massachusetts, although it might be beneficial for the local community to have government subsidy, the problem is that other film industries in other countries, because of the competition, might improve their production technologies so that the long-run effect is that they would be more productive in the future (Vousden, 1990). This argument by trade theory economists has often been cited in order to counter argue is the infant industry argument that is put forward by those supporting local government support to industries in a certain location. Therefore, although certain incentives may be able to boost their productive capacity of the Massachusetts film industry, having intensive government support for that industry might be problematic in the long run, at least according to neoclassical trade theory.

Another argument that is being put forward by those who promote protection of a local film industry is that of potential comparative advantage. Comparative advantage is the ability of an industry to produce a certain goods or service at a lower opportunity cost than that of its competition (Ghatak, 2003). However, the problem with comparative advantage is that potential comparative advantage is very difficult to measure especially in the case when another country already has comparative advantage. Also, comparative advantage is a Ricardian theoretical concept which, although very convenient especially in a two good into country case as is the one that is used in the analytical partial equilibrium framework, is very difficult to apply in real world situations where there are hundreds of simultaneous industries working at the same time and many other factors and variables that could not be integrated into a partial equilibrium model. Using a comparative advantage argument in order to impose protection of the local industry is difficult because it would, at best, not be modeled even by the most skilled of economists and statisticians without any large or significant margin of error for the analysis and policy recommendation. In fact, the lack of comparative advantage is even a reason to site why private investors have not jumped into the industry. An industry which has large amounts of present or future return would expect for local private investors to facilitate them. The reason for this is that the interest — the rate of return — for the capital that is being inflicted by the investors are expected to be much larger as compared to the returns to other industries or even the participation in a financial or money market game.

The infant industry argument in order to subsidize a budding industry is very difficult to defend because of the factor of it being a conceptual framework and a partial analysis — as has already been mentioned above — as well as the fact that protectionism has rarely worked in many other industries in the past when such economists have recommended these policy implications to government units. There are many infant industries that have flourished, however, as had also been cited by these arguments, there are various requirements and a large flip of the chance coin in order for it to work. For example, the Korean manufacturing industry is one of the success stories of protectionism and infant industry argument. However, in many other cases were protectionism was applied and government help was implemented to such industries, technological innovation by those who were not protected at eventually overtaken these countries and firms in the long run.


Booth, A. L. (1995). The economics of the trade union (p. 295).
Ghatak, S. (2003). Introduction to Development Economics (p. 458).
Harriss, C. L., Taxation, C. O., & Development, R. A. E. (1973). Government Spending & Land Values (p. 239).
Massachusetts, & Revenue, D. O. (2008). A Report on the Massachusetts Film Industry Tax Incentives.
Naqvi, S. N. H. (1993). Development Economics (p. 208).
OECD, & Development, O. F. E. C. A. (2006). Subsidy reform and sustainable development (p. 144).
Office, M. F., & Group, B. C.An Economic Survey of the Massachusetts Film and Video Production Industry.
Vousden, N. (1990). The economics of trade protection (p. 305).