Year 13 EconomicsYear 13 Economics

SubsidySubsidy

Questions

1.1. Which farmers are being given the Which farmers are being given the subsidies?subsidies?

2.2. Who is (was) Chirac?Who is (was) Chirac?3.3. How does the cartoon define subsidies?How does the cartoon define subsidies?4.4. What is the cartoonist implying by using a What is the cartoonist implying by using a

pig trough?pig trough?5.5. Is the cartoonist supportive of the use of Is the cartoonist supportive of the use of

subsidies?subsidies?

1.1. European farmers in particular the French farmersEuropean farmers in particular the French farmers2.2. He was the President of France 1995 to 2007He was the President of France 1995 to 20073.3. As free cash handed out to producersAs free cash handed out to producers4.4. That European farmers are insatiable (greedy as a That European farmers are insatiable (greedy as a

pig) in their desire for subsidiespig) in their desire for subsidies5.5. No: By comparing the hard working Australian No: By comparing the hard working Australian

outback farmer to the greedy European farmers outback farmer to the greedy European farmers the cartoon implicitly implies the waste caused by the cartoon implicitly implies the waste caused by subsidiessubsidies

Answers

DefinitionDefinition

A subsidy is a payment by the A subsidy is a payment by the government to a producer in order to government to a producer in order to lower the cost of production of the lower the cost of production of the producerproducer

The goal of the government with the The goal of the government with the introduction of the subsidy is to lower introduction of the subsidy is to lower the price and increase the quantity the price and increase the quantity produced / consumedproduced / consumed

AnalysisAnalysis A subsidy decreases the A subsidy decreases the

cost of production so cost of production so supply will shift to the supply will shift to the right (S1)right (S1)

Price will decrease to P1 Price will decrease to P1 and quantity will increase and quantity will increase to Q1to Q1

Consumer surplus will Consumer surplus will increaseincrease

Producer surplus will also Producer surplus will also increaseincrease

The cost of the subsidy to The cost of the subsidy to the government is the government is therefore partly taken therefore partly taken with gains to consumer with gains to consumer and producer surplus. and producer surplus.

A deadweight loss will be A deadweight loss will be createdcreated

P$

Q

D

S

Pe

Qe

S1

Q1

P1

Advantages of SubsidiesAdvantages of Subsidies

The advantage of a The advantage of a subsidy over a price subsidy over a price control is that a control is that a subsidy will achieve subsidy will achieve the government the government aim of increasing aim of increasing equilibrium equilibrium quantity without a quantity without a shortage as there shortage as there would be with a would be with a maximum price maximum price control.control.

AboveThe new Auckland University BusinessSchool’s building built with private and public funds

Disadvantages of a SubsidyDisadvantages 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

1.1. Which countries or group of countries are Which countries or group of countries are represented by the two people holding the represented by the two people holding the banner?banner?

2.2. Which countries are shown to have the Which countries are shown to have the dominating position in trade negotiations?dominating position in trade negotiations?

3.3. What does the response “up to a point” mean in What does the response “up to a point” mean in the discussion regarding free trade?the discussion regarding free trade?

4.4. Why have I used cartoons that illustrate Why have I used cartoons that illustrate international issues surrounding subsidies and not international issues surrounding subsidies and not New Zealand concerns?New Zealand concerns?

Questions

1.1. The third world and Australia (represented by John Howard)The third world and Australia (represented by John Howard)2.2. The United States, Europe and JapanThe United States, Europe and Japan3.3. The US, Europe and Japan want free trade in those goods The US, Europe and Japan want free trade in those goods

they have a comparative advantage with but do not want they have a comparative advantage with but do not want free trade in agricultural products where the developing free trade in agricultural products where the developing world and Australia plus New Zealand have a comparative world and Australia plus New Zealand have a comparative advantageadvantage

4.4. New Zealand subsidies in the 2007 year totalled $589 New Zealand subsidies in the 2007 year totalled $589 million dollars, as compared to the European Common million dollars, as compared to the European Common Agricultural policies (CAP) which gave subsidies totalling Agricultural policies (CAP) which gave subsidies totalling €€44billion to its farmers. Since 1984 New Zealand has 44billion to its farmers. Since 1984 New Zealand has systematically reduced the subsidies it has given to its systematically reduced the subsidies it has given to its agricultural and manufacturing industries.agricultural and manufacturing industries.

Answers

A Subsidy with an Inelastic A Subsidy with an Inelastic Demand CurveDemand Curve

A subsidy will increase A subsidy will increase supply to S1supply to S1

The price the The price the consumer’s pay will consumer’s pay will decrease and the decrease and the quantity will increase, quantity will increase, while the price the while the price the producer’s receive will producer’s receive will increase.increase.

With an inelastic With an inelastic demand curve the demand curve the incidence of the subsidy incidence of the subsidy will benefit the will benefit the consumer more consumer more than the producer than the producer

Deadweight loss will still Deadweight loss will still be incurredbe incurred

P$

Q

D

S

5

50

S1

3

6

55

A subsidy with an Elastic A subsidy with an Elastic Supply CurveSupply Curve

A subsidy will increase A subsidy will increase supply to S1supply to S1

The price the The price the consumer’s pay will consumer’s pay will decrease and the decrease and the quantity will increase, quantity will increase, while the price the while the price the producer’s receive will producer’s receive will increase.increase.

With an elastic demand With an elastic demand curve the incidence of curve the incidence of the subsidy will benefit the subsidy will benefit the producer more the producer more than the consumer than the consumer

Deadweight loss will still Deadweight loss will still be incurredbe incurred

P$

Q

D

S

5

50

S1

5.50

8.50

60