Government Intervention - Subsidies
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A revision presentation on producer subsidies as a form of government intervention
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Government Intervention - Subsidies
- 2. Government Subsidies for Producers and Consumers A subsidy is any form of government support—financial or otherwise—offered to producers and (occasionally) consumers
- 3. Government Subsidies for Producers and Consumers A subsidy is any form of government support—financial or otherwise—offered to producers and (occasionally) consumers Biofuel subsidies for farmers Solar Panel “Feed- In Tariffs” Apprenticeship Schemes Aid to businesses making losses Subsidies for wind farm investment Food / fuel subsidies for consumers Child Care for working families Subsidies to the rail industry
- 4. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 Demand
- 5. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 A government subsidy per unit of output paid to producers causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded. Demand
- 6. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 A government subsidy per unit of output paid to producers causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded. Demand Supply post subsidy
- 7. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 A government subsidy per unit of output paid to producers causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded. Demand Supply post subsidy Subsidy
- 8. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 A government subsidy per unit of output paid to producers causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded. Demand Supply post subsidy Subsidy Subsidy per unit is shown by the vertical distance
- 9. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 A government subsidy per unit of output paid to producers causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded. Demand Supply post subsidy P2 Q2 Subsidy Subsidy per unit is shown by the vertical distance
- 10. Basic Subsidy Diagram – For Producers Price Quantity / output Supply pre subsidy P1 Q1 A government subsidy per unit of output paid to producers causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded. Demand Supply post subsidy P2 Q2 Subsidy Subsidy per unit is shown by the vertical distance Exam Tip: Don’t forget to explain the transmission mechanism of a subsidy through lower costs of production
- 11. Showing Total Government Spending on the Subsidy Price Quantity / output Market Supply pre subsidy P1 Q1 Market Demand Market Supply post subsidy
- 12. Showing Total Government Spending on the Subsidy Price Quantity / output Market Supply pre subsidy P1 Q1 Market Demand Market Supply post subsidy P2 Q2
- 13. Showing Total Government Spending on the Subsidy Price Quantity / output Market Supply pre subsidy P1 Q1 Market Demand Market Supply post subsidy P2 Q2 P3
- 14. Showing Total Government Spending on the Subsidy Price Quantity / output Market Supply pre subsidy P1 Q1 Total spending on the subsidy is equal to the subsidy per unit multiplied by the level of output – shown by the shaded area Market Demand Market Supply post subsidy P2 Q2 P3
- 15. Showing Total Government Spending on the Subsidy Price Quantity / output Market Supply pre subsidy P1 Q1 Total spending on the subsidy is equal to the subsidy per unit multiplied by the level of output – shown by the shaded area Market Demand Market Supply post subsidy P2 Q2 P3 Consumer pays this price
- 16. Showing Total Government Spending on the Subsidy Price Quantity / output Market Supply pre subsidy P1 Q1 Total spending on the subsidy is equal to the subsidy per unit multiplied by the level of output – shown by the shaded area Market Demand Market Supply post subsidy P2 Q2 P3 Producer receives this price Consumer pays this price
- 17. Justifications for Subsidies for Producers Subsidies are a form of government intervention. They are introduced for a number of economic, social & political reasons
- 18. Justifications for Subsidies for Producers Subsidies are a form of government intervention. They are introduced for a number of economic, social & political reasons Help poorer families e.g. food and child care costs Encourage output and investment in fledgling sectors Protect jobs in loss- making industries e.g. hit by recession Make some health care treatments more affordable Reduce the cost of training & employing workers Achieve a more equitable income distribution Reduce some of the external costs of transport Encourage arts and other cultural services
- 19. Justifications for Subsidies for Producers Subsidies are a form of government intervention. They are introduced for a number of economic, social & political reasons Help poorer families e.g. food and child care costs Encourage output and investment in fledgling sectors Protect jobs in loss- making industries e.g. hit by recession Make some health care treatments more affordable Reduce the cost of training & employing workers Achieve a more equitable income distribution Reduce some of the external costs of transport Encourage arts and other cultural services
- 20. Effects of Subsidies with Different Price Elasticity Inelastic market demand Subsidy has a larger effect on the new equilibrium price Price Qty P1 Q1 D1 P2 Q2 S1 S2 Subsidy
- 21. Effects of Subsidies with Different Price Elasticity Inelastic market demand Subsidy has a larger effect on the new equilibrium price Price Qty Price Qty P1 Q1 Elastic market demand Subsidy has a stronger effect on the new equilibrium quantity D1 P2 Q2 S1 S2 S1 S2 D1 Q1 Q2 P1 P2 Subsidy Subsidy
- 22. Some Evaluation Arguments when Assessing Subsidies • Will they achieve the desired stimulus to demand / consumption? • Is a subsidy sufficient? Might other incentives be needed? Are the subsidies effective in meeting their aims? • Subsidies for investment and research can bring positive spillovers • But firms may become dependent on state aid / financial assistance Will a subsidy affect productivity / efficiency? • Is a subsidy part self-financing? Will it create more tax revenue? • Or does a subsidy create an expensive extra burden for taxpayers? How much does the subsidy cost and who benefits? • For example – do more people find work with child care subsidies? • Or does a subsidy lead to undesired / unintended consequences? Does the subsidy help to correct a market failure?
- 23. Some Evaluation Arguments when Assessing Subsidies • Will they achieve the desired stimulus to demand / consumption? • Is a subsidy sufficient? Might other incentives be needed? Are the subsidies effective in meeting their aims? • Subsidies for investment and research can bring positive spillovers • But firms may become dependent on state aid / financial assistance Will a subsidy affect productivity / efficiency? • Is a subsidy part self-financing? Will it create more tax revenue? • Or does a subsidy create an expensive extra burden for taxpayers? How much does the subsidy cost and who benefits? • For example – do more people find work with child care subsidies? • Or does a subsidy lead to undesired / unintended consequences? Does the subsidy help to correct a market failure?
- 24. Some Evaluation Arguments when Assessing Subsidies • Will they achieve the desired stimulus to demand / consumption? • Is a subsidy sufficient? Might other incentives be needed? Are the subsidies effective in meeting their aims? • Subsidies for investment and research can bring positive spillovers • But firms may become dependent on state aid / financial assistance Will a subsidy affect productivity / efficiency? • Is a subsidy part self-financing? Will it create more tax revenue? • Or does a subsidy create an expensive extra burden for taxpayers? How much does the subsidy cost and who benefits? • For example – do more people find work with child care subsidies? • Or does a subsidy lead to undesired / unintended consequences? Does the subsidy help to correct a market failure?
- 25. Some Evaluation Arguments when Assessing Subsidies • Will they achieve the desired stimulus to demand / consumption? • Is a subsidy sufficient? Might other incentives be needed? Are the subsidies effective in meeting their aims? • Subsidies for investment and research can bring positive spillovers • But firms may become dependent on state aid / financial assistance Will a subsidy affect productivity / efficiency? • Is a subsidy part self-financing? Will it create more tax revenue? • Or does a subsidy create an expensive extra burden for taxpayers? How much does the subsidy cost and who benefits? • For example – do more people find work with child care subsidies? • Or does a subsidy lead to undesired / unintended consequences? Does the subsidy help to correct a market failure?