Download - Producer and Consumer Subsidies
![Page 2: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/2.jpg)
Producer Subsidies
• A subsidy is a payment by the government to suppliers that reduce their costs of production and encourages them to increase output
• State subsidises are financed from general taxation or by borrowing
• The subsidy causes the firm's supply curve to shift to the right
• The amount spent on the subsidy is equal to the subsidy per unit multiplied by total output
![Page 3: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/3.jpg)
Producer Subsidies
• A subsidy is a payment by the government to suppliers that reduce their costs of production and encourages them to increase output
• State subsidises are financed from general taxation or by borrowing
• The subsidy causes the firm's supply curve to shift to the right
• The amount spent on the subsidy is equal to the subsidy per unit multiplied by total output
![Page 4: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/4.jpg)
Producer Subsidies
• A subsidy is a payment by the government to suppliers that reduce their costs of production and encourages them to increase output
• State subsidises are financed from general taxation or by borrowing
• The subsidy causes the firm's supply curve to shift to the right
• The amount spent on the subsidy is equal to the subsidy per unit multiplied by total output
![Page 5: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/5.jpg)
Producer Subsidies
• A subsidy is a payment by the government to suppliers that reduce their costs of production and encourages them to increase output
• State subsidises are financed from general taxation or by borrowing
• The subsidy causes the firm's supply curve to shift to the right
• The amount spent on the subsidy is equal to the subsidy per unit multiplied by total output
![Page 6: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/6.jpg)
Examples of subsidies• A payment on the factor cost of a product – e.g. a guaranteed
minimum price offered to farmers such as under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business – e.g. a grant given to cover losses in the rail industry or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of the credit crunch
• Financial assistance (loans and grants) for businesses setting up in areas of high unemployment
![Page 7: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/7.jpg)
Examples of subsidies• A payment on the factor cost of a product – e.g. a guaranteed
minimum price offered to farmers such as under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business – e.g. a grant given to cover losses in the rail industry or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of the credit crunch
• Financial assistance (loans and grants) for businesses setting up in areas of high unemployment
![Page 8: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/8.jpg)
Examples of subsidies• A payment on the factor cost of a product – e.g. a guaranteed
minimum price offered to farmers such as under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business – e.g. a grant given to cover losses in the rail industry or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of the credit crunch
• Financial assistance (loans and grants) for businesses setting up in areas of high unemployment
![Page 9: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/9.jpg)
Examples of subsidies• A payment on the factor cost of a product – e.g. a guaranteed
minimum price offered to farmers such as under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business – e.g. a grant given to cover losses in the rail industry or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of the credit crunch
• Financial assistance (loans and grants) for businesses setting up in areas of high unemployment
![Page 10: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/10.jpg)
Examples of subsidies• A payment on the factor cost of a product – e.g. a guaranteed
minimum price offered to farmers such as under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business – e.g. a grant given to cover losses in the rail industry or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of the credit crunch
• Financial assistance (loans and grants) for businesses setting up in areas of high unemployment
![Page 11: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/11.jpg)
Diagrams matter!
Diagram must havesFully labeledOriginal and new equilibriumDemand and supply the correct way round Well explained – you must explain why the
curve has shifted, in detailThink about the elasticity – e.g. oil has
inelastic demand and supply
![Page 12: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/12.jpg)
Analysing the effects of a subsidy
Costs and Benefits
Output
Demand
Supply post subsidyA
B
Supply pre subsidy
![Page 13: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/13.jpg)
Analysing the effects of a subsidy
Costs and Benefits
Output
Demand
Supply post subsidyA
B
Supply pre subsidy
C
D
![Page 14: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/14.jpg)
Analysing the effects of a subsidy
Costs and Benefits
Output
Demand
Supply post subsidyA
B
Supply pre subsidy
C
D
ESupplier
receives C
Consumer pays B
![Page 15: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/15.jpg)
Analysing the effects of a subsidy
Costs and Benefits
Output
Demand
Supply post subsidyA
B
Supply pre subsidy
C
D
ESupplier
receives C
Consumer pays B
Subsidy payment
![Page 16: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/16.jpg)
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Market price and quantity before the subsidy is P1 and Q1
![Page 17: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/17.jpg)
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Consumer surplus is area ABP1
A
B
![Page 18: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/18.jpg)
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Producer surplus = area P1BC
A
B
C
![Page 19: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/19.jpg)
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
The subsidy causes a fall in market price to P2
A
B
C
Q2
P2
![Page 20: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/20.jpg)
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Consumer surplus increases to area ADP2
A
B
C
Q2
P2
D
![Page 21: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/21.jpg)
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Producer surplus boosted through the subsidy payment
A
B
C
Q2
P2
D
P3E
![Page 22: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/22.jpg)
Arguments for Subsidies
Controlling price inflation e.g. food prices
Boost employment especially in poor areas
Improve human capital and productivity
Protect strategic / infant industries
Promote growing demand for renewables
Improve affordability for low-income families
![Page 23: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/23.jpg)
Arguments for Subsidies
Controlling price inflation e.g. food prices
Boost employment especially in poor areas
Improve human capital and productivity
Protect strategic / infant industries
Promote growing demand for renewables
Improve affordability for low-income families
![Page 24: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/24.jpg)
Arguments for Subsidies
Controlling price inflation e.g. food prices
Boost employment especially in poor areas
Improve human capital and productivity
Protect strategic / infant industries
Promote growing demand for renewables
Improve affordability for low-income families
![Page 25: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/25.jpg)
Arguments for Subsidies
Controlling price inflation e.g. food prices
Boost employment especially in poor areas
Improve human capital and productivity
Protect strategic / infant industries
Promote growing demand for renewables
Improve affordability for low-income families
![Page 26: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/26.jpg)
Arguments for Subsidies
Controlling price inflation e.g. food prices
Boost employment especially in poor areas
Improve human capital and productivity
Protect strategic / infant industries
Promote growing demand for renewables
Improve affordability for low-income families
![Page 27: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/27.jpg)
Arguments for Subsidies
Controlling price inflation e.g. food prices
Boost employment especially in poor areas
Improve human capital and productivity
Protect strategic / infant industries
Promote growing demand for renewables
Improve affordability for low-income families
![Page 28: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/28.jpg)
India and Food SubsidiesIndia is introducing a policy aimed at providing subsidised food to two thirds of the population.
The new food security law will provide five kilos of cheap grain every month to nearly 800 million Indians.
Can a new food law solve as long-running problem or will it drain the country's finances? The government says that money is not a problem.
![Page 29: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/29.jpg)
Thailand and Rubber SubsidiesThailand has doubled subsidies to rubber farmers. The Thai cabinet on Tuesday approved the assistance of 21.2bn baht ($659m) to rubber smallholders, after a dispute that has led to shipment delays and to scuffles between police and farmers demonstrating in the south.
Thailand is a leading world exporter of both rubber and rice, but has faced problems managing both industries as state financial support programmes have led to the build-up of stockpiles.
The Thai government’s expanding commodity subsidy programme is in part an effort to bolster the income of farmers at a time of falling world prices. Natural rubber prices have almost halved since the peak of February 2011
Source: News reports, October 2013
![Page 30: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/30.jpg)
Is there a case for a NEET subsidy?• The number of young people not
in education, employment or training in the UK was 1.07m people aged 16 to 24 in the 3rd quarter of 2013
• Youth Contract launched in 2011 – it offers internships, work experience and subsidies for businesses to take on new employees.
• But few companies are taking up the offer of wage subsidies. In the first year of the scheme – designed to fund jobs for 160,000 people over three years – it was used to employ fewer than 5,000 young people
Source: News reports, Oct 2013
![Page 31: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/31.jpg)
Child care subsidies – a way forward?
Britain ranks 15th out of 25 OECD nations for maternal employment, languishing behind Germany, France, Canada and the USA
In New Zealand – the government offers subsidies for in-home nanny services. The childcare rebate (subsidy) currently provides parents with 50% of their childcare costs up to a total of $7,500 a year for each child.
With the UK childcare voucher scheme, an average family with two working parents claiming vouchers can save up to £1,866 a year towards their childcare costs if both parents buy vouchers but only if their employer has signed up to a scheme
![Page 33: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/33.jpg)
Biomass subsidies have increased demand for wood, pushing prices higher
Price of Timber
Quantity of Timber
D1
D2
S1
Q1 Q2
P1
P2
![Page 35: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/35.jpg)
Evaluation – Criticism of Subsidies
Distortion of market prices / incentives
Risk of fraud from subsidy payments
Expensive – high cost for taxpayers
Inequitable – many rich people may benefit Environmental damage Protects inefficient
businesses
![Page 36: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/36.jpg)
Evaluation – Criticism of Subsidies
Distortion of market prices / incentives
Risk of fraud from subsidy payments
Expensive – high cost for taxpayers
Inequitable – many rich people may benefit Environmental damage Protects inefficient
businesses
![Page 37: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/37.jpg)
Evaluation – Criticism of Subsidies
Distortion of market prices / incentives
Risk of fraud from subsidy payments
Expensive – high cost for taxpayers
Inequitable – many rich people may benefit Environmental damage Protects inefficient
businesses
![Page 38: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/38.jpg)
Evaluation – Criticism of Subsidies
Distortion of market prices / incentives
Risk of fraud from subsidy payments
Expensive – high cost for taxpayers
Inequitable – many rich people may benefit Environmental damage Protects inefficient
businesses
![Page 39: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/39.jpg)
Evaluation – Criticism of Subsidies
Distortion of market prices / incentives
Risk of fraud from subsidy payments
Expensive – high cost for taxpayers
Inequitable – many rich people may benefit Environmental damage Protects inefficient
businesses
![Page 40: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/40.jpg)
Evaluation – Criticism of Subsidies
Distortion of market prices / incentives
Risk of fraud from subsidy payments
Expensive – high cost for taxpayers
Inequitable – many rich people may benefit Environmental damage Protects inefficient
businesses
![Page 41: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/41.jpg)
Do subsidies hold back
innovation?
![Page 42: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/42.jpg)
Surpluses can lead to
excess capacity and long
term damage –
the EU fishing
industry is an example
![Page 43: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/43.jpg)
Short term and long term effects“In general, subsidies should be employed to change behaviour and solve specific problems rather than to serve as a long-term crutch for producers. If not, it will stifle innovation and make producers both less competitive and more dependent on government.”
Source: Jason Clay, Guardian, August 2013
![Page 46: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/46.jpg)
Using cross-elasticity of demand, assess the likely relationship between the demand for solar panels and the price of household electricity from non-renewable sources
![Page 47: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/47.jpg)
Rising electricity prices
Incentives to switch to
renewable energy
There is a cost to switching
Rising market demand for solar
panels
![Page 48: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/48.jpg)
Despite a strong rise in demand, the market price of solar panels has fallen in recent years. With the help of a supply and demand diagram, explain why this can have happened
Quantity
D1
S1
P1
Q1
Price of solar
panels
![Page 49: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/49.jpg)
Despite a strong rise in demand, the market price of solar panels has fallen in recent years. With the help of a supply and demand diagram, explain why this can have happened
Price of solar
panels
Quantity
D1
S1
P1
Q1
D1
![Page 50: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/50.jpg)
Despite a strong rise in demand, the market price of solar panels has fallen in recent years. With the help of a supply and demand diagram, explain why this can have happened
Price of solar
panels
Quantity
D1
S1
P1
Q1
D2
P2
![Page 51: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/51.jpg)
Despite a strong rise in demand, the market price of solar panels has fallen in recent years. With the help of a supply and demand diagram, explain why this can have happened
Price of solar
panels
Quantity
D1
S1
P1
Q1
D2
P2
S2
![Page 52: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/52.jpg)
Despite a strong rise in demand, the market price of solar panels has fallen in recent years. With the help of a supply and demand diagram, explain why this can have happened
Price of solar
panels
Quantity
D1
S1
P1
Q1
D2
P2
S2
P3
![Page 53: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/53.jpg)
Despite a strong rise in demand, the market price of solar panels has fallen in recent years. With the help of a supply and demand diagram, explain why this can have happened
Price of solar
panels
D1
S1
P1
Q1
D2
P2
S2
P3
Q2
![Page 54: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/54.jpg)
Evaluate the argument for government intervention in the
market for solar panels to encourage the growth of renewable energy rather than allowing free market
forces to operate
![Page 55: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/55.jpg)
The case for solar subsidiesPromotes renewable energy and lowers oil dependency
Creates thousands of new jobs – + a positive multiplier effect
Cuts bills for consumers & councils
Economies of scale if the take-up of panels increases
![Page 56: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/56.jpg)
Solar subsidies – critical evaluation
Subsidies benefit richer households
Limited effectiveness for money spent – opportunity cost
Mis-selling of solar panels especially to vulnerable households
Most solar panels are imported
![Page 57: Producer and Consumer Subsidies](https://reader036.vdocuments.net/reader036/viewer/2022081413/54722508b4af9f980a8b4d87/html5/thumbnails/57.jpg)
Get help from fellow students, teachers and tutor2u on Twitter:
#econ1@tutor2u@tutor2u-econ