Chapter 6 (4) Flashcards
SUBSIDIES
is the reverse of a tax; it’s a requirement that the gov’t = pay an extra amount to producers / consumers of a good
► Gov’t = use subsidies to encourage the production & consumption of a particular good / service
► Can also use subsidies as an alternative to price controls to benefit certain groups–w/out generating a shortage / excess quantity supplied.
Example, tortilla.
► With a tax: The quantity supplied & demanded decreases, and the government collects revenue
► With a subsidy: The quantity supplied & demanded increases, and the gov’t spends money
How does a subsidy affect the supply & demand curve?
- Does a subsidy to sellers affect the supply curve?
► Yes, supply increases. - Does a subsidy to sellers affect the demand curve?
► No, demand stays the same. - How does a subsidy to sellers affect the market equilibrium?
► The equilibrium price decreases & the equilibrium quantity increases.
► the equilibrium quantity w/ the new supply curve increases as consumers move down along the demand curve to the new equilibrium point
How does a subsidy benefit both buyers & sellers?
► It increases total surplus within the market
► However, the subsidy = imposes a cost on the gov’t & ultimately on taxpayers
Is the subsidy worth the cost?
That depends on how much we value the increased production of tortillas & the reduced cost to consumers vs the opportunity cost of the subsidy–that is, whatever other use the gov’t or taxpayers might have made if that $21.7 million.
► as with a tax, the effect of a subsidy = the same regardless of whether it is paid to producers / consumers (read pg. 187)
The side of the market that is more price elastic = receives more of the benefit
► In our example, both have almost the same benefit both have the same benefit
as w/ taxes:
► it is important to note that who gets what share of benefit from the subsidy –> does not depend on who receives the subsidy
