producer and consumer subsidies
DESCRIPTION
A revision presentation on the economics of producer and consumer subsidies as forms of government intervention in markets. There are a number of up to date examples highlighted together with an evaluation of the benefits and costs of subsidy payments. This is designed as a revision aid for unit 1 students taking their microeconomics papers.TRANSCRIPT
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
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
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
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
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
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
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
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
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
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
Analysing the effects of a subsidy
Costs and Benefits
Output
Demand
Supply post subsidyA
B
Supply pre subsidy
Analysing the effects of a subsidy
Costs and Benefits
Output
Demand
Supply post subsidyA
B
Supply pre subsidy
C
D
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
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
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
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Consumer surplus is area ABP1
A
B
Consumer and producer surplus
Price
Output
Demand
S2 post subsidy
S1 pre subsidy
P1
Q1
Producer surplus = area P1BC
A
B
C
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
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
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
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
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
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
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
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
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
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.
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
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
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
Biomass subsidies have increased demand for wood, pushing prices higher
Price of Timber
Quantity of Timber
D1
D2
S1
Q1 Q2
P1
P2
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
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
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
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
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
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
Do subsidies hold back
innovation?
Surpluses can lead to
excess capacity and long
term damage –
the EU fishing
industry is an example
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
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
Rising electricity prices
Incentives to switch to
renewable energy
There is a cost to switching
Rising market demand for solar
panels
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
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
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
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
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
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
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
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
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
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