Transcript Subsidy & Allocative Efficiency

Year 13 Economics
Subsidy
Questions
1.
2.
3.
4.
5.
Which farmers are being given the subsidies?
Who is (was) Chirac?
How does the cartoon define subsidies?
What is the cartoonist implying by using a pig
trough?
Is the cartoonist supportive of the use of
subsidies?
Answers
1.
2.
3.
4.
5.
European farmers in particular the French farmers
He was the President of France 1995 to 2007
As free cash handed out to producers
That European farmers are insatiable (greedy as a pig)
in their desire for subsidies
No: By comparing the hard working Australian outback
farmer to the greedy European farmers the cartoon
implicitly implies the waste caused by subsidies
Definition
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
A subsidy is a payment by the government
to a producer in order to lower the cost of
production of the producer
The goal of the government with the
introduction of the subsidy is to lower the
price and increase the quantity produced /
consumed
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A subsidy decreases the cost
of production so supply will
shift to the right (S1)
Price will decrease to P1 and
quantity will increase to Q1
Consumer surplus will
increase
Producer surplus will also
increase
The cost of the subsidy to
the government is therefore
partly taken with gains to
consumer and producer
surplus.
A deadweight loss will be
created
P$
Analysis
S
S1
Pe
P1
D
Qe Q1
Q
Advantages of Subsidies

The advantage of a
subsidy over a price
control is that a
subsidy will achieve
the government aim
of increasing
equilibrium quantity
without a shortage as
there would be with a
maximum price
control.
Above
The new Auckland University Business
School’s building built with private
and public funds
Disadvantages of a Subsidy
• The disadvantage of a
subsidy is that it may be very
expensive for the government.
• Money spent on a subsidy
can not be used elsewhere.
• As a intervention into the
marketplace a deadweight
loss will be incurred.
• Producers will increase there
production even if the market
does not require the product –
perhaps even causing
environmental damage from
over production
Questions
1.
2.
3.
4.
Which countries or group of countries are represented
by the two people holding the banner?
Which countries are shown to have the dominating
position in trade negotiations?
What does the response “up to a point” mean in the
discussion regarding free trade?
Why have I used cartoons that illustrate international
issues surrounding subsidies and not New Zealand
concerns?
Answers
1.
2.
3.
4.
The third world and Australia (represented by John Howard)
The United States, Europe and Japan
The US, Europe and Japan want free trade in those goods they
have a comparative advantage with but do not want free trade in
agricultural products where the developing world and Australia
plus New Zealand have a comparative advantage
New Zealand subsidies in the 2007 year totalled $589 million
dollars, as compared to the European Common Agricultural
policies (CAP) which gave subsidies totalling €44billion to its
farmers. Since 1984 New Zealand has systematically reduced the
subsidies it has given to its agricultural and manufacturing
industries.
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A subsidy will increase
supply to S1
The price the consumer’s
pay will decrease and the
quantity will increase,
while the price the
producer’s receive will
increase.
With an inelastic demand
curve the incidence of the
subsidy will benefit the
consumer
more than
the producer
Deadweight loss will still
be incurred
P$
A Subsidy with an Inelastic
Demand Curve
S
S1
6
5
3
D
50 55
Q
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A subsidy will increase
supply to S1
The price the consumer’s
pay will decrease and the
quantity will increase,
while the price the
producer’s receive will
increase.
With an elastic demand
curve the incidence of the
subsidy will benefit the
producer
more than
the consumer
Deadweight loss will still
be incurred
P$
A subsidy with an Elastic Supply
Curve
S
S1
8.50
5
5.50
D
50 60
Q