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Economics -- 1.3 Government intervention > subsides > Flashcards

subsides Flashcards

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1
Q

What is a subsidy?

A

Assistance given by the government to individuals or groups of people, such as firms, consumers, industries or sectors of an economy

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2
Q

In what form can subsidies be given?

A

Direct cash payments or other forms of assistance such as low-interest or interest-free loans, the provision of goods and services by the government at below market prices; taxes (paying lower or no taxes); and others

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3
Q

What are examples of low-interest or interest-free loans?

A

Loans to students, or low-income consumers, for the purchase of goods and services such as housing, or to firms needing assistance

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4
Q

What are subsides consisting of cash payments by the government to firms called?

A

Specific subsidies

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5
Q

Why are specific subsides called such?

A

Because the payments are usually a fixed amount per unit of output

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6
Q

Why do subsides have the effect of changing the allocation of resources?

A

Because they affect relative prices, thus changing the signals and incentives prices convey

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7
Q

What effect do subsidies granted to a firm (or group of firms) have?

A

It increases the price receive by producers, causing them to produce more, and lowering the price paid by consumers, causing them to buy more

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8
Q

How does the allocation of resources change after a subsidy has been implemented?

A

It results in greater production and consumption than in the free market, because more is produced and bought

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9
Q

What does a subsidy introduce to an economy where resources are allocated efficiently?

A

Allocative inefficiency and welfare losses

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10
Q

What does a subsidy introduce to an economy where resources are allocated inefficiently?

A

It can work to improve the allocation of resources if it is designed to correct the source of the inefficiency

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11
Q

Why would an economy begin with allocative inefficiency?

A

Due to market imperfections

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12
Q

Why do governments grant subsides to firms?

A
  • to increase revenues (and hence incomes) of producers
  • to make certain goods (necessities) affordable to low income consumers
  • to encourage production and consumption of desirable goods or services
  • to support growth of particular industries in an economy
  • to encourage exports of particular goods
  • to improve allocation of resources by correcting positive externalities
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13
Q

How can subsides be used to increase revenues (and hence incomes) of producers?

A

They increase the revenues of producers

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14
Q

Who do governments often grant subsides to?

A

Particular producers whose revenues (and therefore incomes) they would like to support

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15
Q

Who is a common receiver of subsides?

A

Producers of agriculture products

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16
Q

How can subsides be used to make certain goods (necessities) affordable to low income consumers?

A

Subsides have the effect of lowering the price of the good that is paid by consumers, thus making the good more affordable

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17
Q

How can subsides be used to encourage production and consumption of particular goods and services that are believed to be desirable for consumers?

A

It has the effect of increasing the quantity of a good produced and consumed

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18
Q

What are some examples of goods or services considered to be desirable by the government?

A

Education and vaccinations

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19
Q

What is an example of governments making necessities affordable to low income consumers?

A

They may wish to make a food staple more affordable, such as bread or rice

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20
Q

How can subsides be used to support the growth of particular industries in an economy?

A

They increase the quantity of output produced, so they can support the growth of that particular industry

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21
Q

What is an example of subsides for promoting growth of a particular industry?

A

In the solar power industry, subsides are intended to promote the production of biofuels from ethanol production

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22
Q

How can subsides be used to encourage exports of particular goods?

A

Since they lower the price paid by consumers, they are sometimes granted on exported goods as lower export prices increase the quantity of exports

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23
Q

How are subsides a method to improve the allocation of resources by correcting positive externalities?

A

They reduce allocative inefficiencies; make it possible for allocative efficiency to be improved

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24
Q

Why do subsides reduce allocative inefficiencies?

A

Because they correct positive externalities as market imperfections prevent the achievement of allocative efficiency

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25
Q

Why are subsides a controversial topic in economics?

A

Because they are very extensive and are often designed to achieve certain objectives that may not be consistent with other important objectives

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26
Q

What is an example of a subsidy causing controversy?

A

Many countries grant subsides to fossil fuels, which run contrary to objectives of sustainable development, and which also contradict the objectives of other subsides intended to support the growth of alternative energy

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27
Q

What are fossil fuel subsides known as?

A

‘Perverse subsides’

28
Q

What subsides, other than the ones for fossil fuels, highly controversial?

A

Those for agriculture and exports

29
Q

How is the initial pre-subsidy equilibrium determined?

A

By the intersection of the demand curve D and the supply curve S1, giving rise to equilibrium price Pe paid by consumers and received by producers, and equilibrium quantity Qe

30
Q

What does a subsidy mean for the firm (producers)?

A

For each unit of output the firm is willing and able to produce, it receives a lower price than the original by the amount of the subsidy

31
Q

What is the effect on the supply curve of the government granting a subsidy?

A

A downward, parallel shift of the supply curve by the amount of the subsidy

32
Q

What is the new supply curve called after a subsidy has been granted?

A

S2 or S1 – subsidy

33
Q

What does the rightward shift of the supply curve, as a result of a subsidy being granted, mean?

A

That for each price, the firm is now willing to supply more output

34
Q

Why does the demand curve remain constant?

A

Because demand is not affected

35
Q

Where is the new equilibrium after the subsidy has been granted?

A

Where price is Pc (the price paid by consumers) and the quantity produced and sold increases to Q + subsidy

36
Q

What does the firm receive after a subsidy has been granted?

A

Pp, which is equal to the price paid by the consumer (Pc) plus the subsidy per unit of output

37
Q

Why does the firm now receive Pp because of the tax?

A

Since the vertical difference between the two supply curves represents the subsidy per unit of output; this added to Pc is what the producers receive (Pp)

38
Q

What is Pp?

A

Pc plus the subsidy the firm had received

39
Q

What is Pc?

A

The price that the consumers pay

40
Q

How does a subsidy effect the market’s equilibrium quantity produced and consumed?

A

It increases from Qe to Q + subsidy

41
Q

How does a subsidy effect the market’s equilibrium quantity price?

A

It falls from Pe to Pc (the price paid by consumers)

42
Q

How does a subsidy effect the market’s price received by producers?

A

Increases from Pe to Pp

43
Q

How does a subsidy effect the market’s government spending?

A

(Pp – Pc) x Q + subsidy; or the amount of subsidy per unit multiplied by the number of units sold

44
Q

How does a subsidy effect the market’s allocation of resources (allocative efficiency)?

A

There is an over allocation of resources to the production of the good: Q + subsidy is greater than the free market quantity, Qe

45
Q

How can consumers be affected by subsides?

A

They are better off because they receive more of the good or service for a lower price

46
Q

Why exactly are consumers better off by subsides in a market?

A

They are affected by the fall in price of the good from Pe to Pc, and the increase in quantity purchased (from Qe to Q + subsidy)

47
Q

How can producers be affected by subsides?

A

They are better off because they receive a higher price (Pp > Pe) and produce a larger quantity (Q + subsidy > Qe)

48
Q

Why exactly are producers better off by subsides in a market?

A

Their revenue is increased because of the price and quantity effects: before the firm revenue was Pe x Qe, and after it increases to Pp x Q + subsidy

49
Q

How can the governments be affected by subsides?

A

They pay the subsidy, which is a burden on its budget

50
Q

What is the impact on the government’s budget after a subsidy?

A

Whatever the case, it is negative

51
Q

How do governments obtain the revenues for the subsidy?

A

They may have to reduce expenditures elsewhere in the economy, or it may have to raise taxes, or it may have to run a budget deficit

52
Q

What is a budget deficit?

A

Where government expenditures are greater than tax revenues

53
Q

How can workers be affected by subsides?

A

They are better off because there are new / more jobs available

54
Q

Why exactly are workers better off by subsides in a market?

A

As output expands from Qe to Q + subsidy, firms are likely to hire more workers to produce the extra output

55
Q

How can society as a whole be affected by subsides?

A

They are worse off because of the over allocation of resources to production of the good

56
Q

Why exactly are society as a whole worse off by subsides in a market?

A

Q + subsidy > Qe so there is an over allocation of resources (allocative inefficiency)

57
Q

How can foreign producers be affected by subsides?

A

If the subsidy is granted on exports (goods sold to other countries), they are worse off as it lowers price and increases the quantity of exports

58
Q

Why exactly are foreign producers worse off by subsides in a market?

A

They may be unable to compete with the lower price of the subsidised goods that the domestic producers are allowed to go by

59
Q

What is a real world focus of subsides?

A

Farm subsides in the US

60
Q

For what certain agricultural products have American farmers received subsides?

A

Corn, wheat, soybeans, cotton, rice and others

61
Q

When did the US implement its subsides for farmers?

A

Since the Great Depression of the 1930s

62
Q

When was a law passed to end subsides and create a free market in the US agriculture industry?

A

In 1996, but the free market in agriculture never materialised

63
Q

Why does support to farmers continue to cost tax payers about $5 billion a year?

A

Because the support is justified by the common belief that the government is helping small farmers survive

64
Q

What did the US Department of Agriculture say about subsides not helping the small famers?

A

That from 1995 to 2009, the largest and wealthiest top 10% of farmers received 74% of farm subsides

65
Q

Why are larger and wealthier farmers granted more of the subsides?

A

Because the subsides are paid according to the amount of crop produced; and so smaller farmers receive very small amounts, while farmers who cultivate fruits and vegetables receive no subsides at all

Economics -- 1.3 Government intervention (4 decks)

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