Which Of These Is A Reason For Government Subsidization Of Goods And Services?

Government subsidies

Introduction

Just as we have seen that the imposition of a sales tax impacts on the market equilibrium for a good or service, a subsidy on a product will practise the aforementioned - as the kickoff video on this page describes, a subsidy is effectively a reverse tax on a product. Again outset with the same practice where students list those items which their authorities currently subsidises and then suggest possible reasons why that subsidy is put in place?

The main aim of this lesson is for your students to actually question why it is that governments subsidise certain goods and services and not others? How many of those subsidised goods can really be called 'merit goods' and hence benefit the citizens of that country?

Enquiry question

What are subsidies and what are the consequences of a government decision to place a subsidy on a skillful or service.

Teacher notes

Lesson time: 80 minutes

Lesson objectives:

Explain why governments provide subsidies, and draw examples of subsidies.

Describe a diagram to prove a subsidy, and analyse the impacts of a subsidy on market outcomes.

Talk over the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government.

Plot demand and supply curves for a production from linear functions and and then illustrate and/or calculate the effects of the provision of a subsidy on the market (on price, quantity, consumer expenditure, producer revenue, government expenditure, consumer surplus and producer surplus). (HL merely).

Teacher notes:

1. Starting time activity, start with the opening questions, which you might need to guide your students with. For the video, prezi and opening questions should take around 20 minutes.

2. Processes - technical vocabulary - The students learn the content reading the class handout, which you can print off and handout to your course. Allow 15 minutes for this activity and the first two activities based on the technical vocabulary.

three. Reinforcement processes - the handout includes ii reinforcement activities, where students can exam their mathematical skills, computing the bear upon of a subsidy for example, given a ready of data provided, also as short answer responses where they can apply their knowledge. (15 minutes)

4. Reflection activities - activities 5, half dozen and seven provides a reflection do. Ask your students to reverberate on whether the goods subsidised by governments really benefit the society or not? (15 minutes). I would advise activeness 7 to be completed as a grouping exercise as this works well.

5. Link to the assessment - this page contains a relevant paper i style question on this topic, which your students can read and depict a programme for completion. Time allowed for this activity should exist betwixt 10 and 15 minutes.

Outset activity

Start by watching the following video, which explains the term subsidy and then answer the question which follows, before reading the class handout.

Question:

Which goods and services are subsidised by your government? Why does the government choose to subsidise those products? Consider the political every bit well as social and economic reasons.

Reasons include:

reducing the price of certain bones items then that they are affordable for all income groups
encouraging the consumption and production of desirable products e.g. education and wellness services
improving the competitiveness of domestic businesses in overseas markets.

Cardinal terms:

Subsidy - tin be defined every bit support provided by the regime, to encourage the production or consumption of a good or service.

Merit goods - appurtenances or services which consumers volition often undervalue just which governments believe provide positive externalities.

Opportunity cost - the toll of the subsidy in terms of the alternative opportunities foregone. Examples might include college taxes or cuts to public spending elsewhere.

Regime grants - a form of government subsidy provided to assist new or struggling businesses, peculiarly those in strategically of import sectors such every bit bio-tech.

Guaranteed minimum payment - a type of subsidy guaranteeing a minimum price for a product, such as the one offered by many governments to farmers so that production levels are guaranteed.

Bail-outs - specific help provided to key industries when struggling financially east.chiliad. the assistance provided to financial institutions and GM in the wake of the 2008 financial crisis.

Financial assistance - a type of authorities aid paid in the form of a grant or loan to encourage businesses to set up in areas of high unemployment.

The activities on this page are available as a handout at: Subsidy

Activity 1

The diagram to the correct represents the market for good 10, a merit good.

(a) Indicate the original (without the subsidy) equilibrium toll and output.

P1 with Q1 representing the equilibrium output.

(b) Complete the judgement past filling in the missing words:

Consumers do good from a subsidy through lower prices, while producers benefit from higher acquirement. The proportion of the payment enjoyed by both depends on the relative _____ and _____ of the product.

PED, Pes

i. The increase in quantity demanded for the product

Q1 - Q2

two. The new equilibrium price and output

P2 and Q2

iii. The new cost paid by the consumer and the government

The consumer now pays P2 with the regime contributing D-P2

iv. The size of the subsidy

A - C

vi. The increase in acquirement enjoyed by the producer.

This is illustrated by the green shaded area.

Activity 2

The diagram to the left represents the market for good Ten. The government then decides to intervene in the market place for this product by providing a subsidy.

(a) Illustrate the touch on of a apartment rate subsidy on the market for this production.

(b) What is the new equilibrium level of output and cost after the subsidy.

P2 and Q2

A - C and the total cost to the authorities is illustrated by the green shaded area.

(d) How much does producer revenue increase past?

D x Q2 minus P1 x Q1

(eastward) Indicate the cost of the good if the selling price had fallen by the whole value of the subsidy.

Action 3

The bear on of PED on a market subsidy

(a) The diagram to the right illustrates the market for a PED elastic production, renewable energy. Illustrate the touch on equilibrium price and output, post-obit the application of a subsidy on the good.

(b) Following the subsidy which variable would we expect to meet the largest modify - quantity demanded or selling price?

Following a decision by the authorities to subsidise this product, to encourage consumption of renewable energy sources, sales of clean energy rises significantly - proportionately more than the relatively fall in price (Q1-Q2, rather than P1-P2).

(c) The next diagram illustrates the market for children's shoes, a PED inelastic expert. Illustrate the impact on equilibrium price and output, following the application of a subsidy on the product.

(d) Describe the impact on both sales and price when a subsidy is practical to a PED inelastic good.

The subsidy has little bear upon on consumption levels, with the rise in quantity produced smaller than proportional to the autumn in price - Q1-Q2, rather than P1-P2.

Activity iv (HL only)

The demand and supply for domestic electricity consumption is identified on the post-obit tabular array:

Price (kw) $	Demand	Supply pre-subsidy	Supply mail-subsidy
5	twoscore,000	0	10,000
10	35,000	five,000	15,000
15	30,000	10,000	20,000
xx	25,000	fifteen,000	25,000
25	20,000	20,000	30,000
thirty	fifteen,000	25,000	35,000
35	10,000	30,000	40,000
forty	5,000	35,000	45,000
45	0	40,000	fifty,000

(a) Illustrate the to a higher place information on the following graph paper, highlighting the size of the subsidy provided by the regime.

(b) Calculate the cost of the subsidy to the government.

25,000 x $10 = $ 250,000

The alternative public services that could have been provided for $ 250,000 could have been spent on, or a reduction in tax for the same amount.

(d) Explain why the authorities may have chosen to provide the subsidy on electricity.

Electricity is a necessity for many households, peculiarly those on low incomes.

Action 5: G20 governments still propping up fossil fuel exploration

In 2009, the G20 pledged to phase out 'inefficient' fossil fuel subsidies, yet inquiry discovered that governments are nonetheless spending $88 billion every year supporting exploration – more than than double what the oil and gas companies are investing. A breakdown of subsidy past country is illustrated beneath:

State	Size of subsidy in Usa$ per capita
Kingdom of saudi arabia	3,395
Russian federation	2,334
U.s.	2,177
China	i,652
Canada	1,283
Commonwealth of australia	1,259
Nihon	1,240
Federal republic of germany	645
UK	635

(a) Consider the data represented in the table which illustrates the level of fossil fuel subsidy paid by G20 countries and illustrate the effect of the subsidy on both fossil fuels and firms producing culling / renewable free energy sources.

A subsidy on carbon based energy sources increases the quantity produced of fossil fuels, whilst reducing the consumption of renewable energy.

(b) State whether you believe that the OEDC nations should be subsidising fossil fuels?

This is is manifestly a matter of opinion equally carbon based energy resource are used to power many homes and industries. However, from an ecology viewpoint it seems hard to justify such a subsidy.

Activity half dozen

When a government places a subsidy on a product both the producer and consumer benefits. However, there are losers in terms of opportunity toll. Governments can either reduce spending elsewhere or raise taxes.

Watch the short video on bread subsidies in Egypt and then respond the post-obit questions:

(a) Outline the arguments for and confronting the Egyptian authorities providing a subsidy for bread?

The key term hither is opportunity price, the six cents that it costs the government to produce each loaf of bread will need to be financed out of either tax revenue or cuts in spending elsewhere.

(b) Is there a danger that simply subsidising a product encourages firms to be inefficient? What damage might exist done to firms who are not receiving the subsidy?

Offering a subsidy to some firms and not others distorts the marketplace. It tin crusade inefficiency in the business firm receiving the subsidy and may also drive some other (perfectly good for you firms) out of business.

Activity 7: reflection practise

Divide the class into two groups.

Ane group should spend 10 minutes compiling a list of some of the reasons that governments provide subsidies. The second group can then compile a similar list, detailing some of the arguments against government subsidies. Afterwards compare the two lists and decide overall whether or not governments are correct to implement a subsidy on certain products or not?

The reasons why a government will provide a subsidy to firms should include:

To lower the price of essential basic items such every bit fuel and basic nutrient stuffs. In many parts of the center east for instance, bread is a key part of the local diet. As such, given the low levels of income in many parts of the region, governments subsidise this basic food production so that it is cheap and widely bachelor.

The 2nd reason for providing a subsidy is to guarantee the production of essential services or products. We can see this in European union farming policy where farmers are provided with a subsidy to guarantee food production. Public services such as health,education, medicine and public transport are as well provided free of charge or at least cheaply to the consumer at the point of sale.

A subsidy can also be used equally a mode of boosting economic growth by funding infrastructure projects.

Lastly, governments can provide a subsidy in lodge to aid domestic firms from foreign imports. It can also be used to help reduce the price of domestic products so that they can gain market share overseas.

Arguments against subsidies

The opportunity cost of any subsidy i.e. could the money used in providing the subsidy be better spent elsewhere?

Some economists also argue that subsidies misconstrue the working of the gratuitous market and often make the situation worse. This is particularly true when decisions are made for political rather than strictly economic or social reasons.

Lastly, some economists likewise argue that subsidies encourage inefficiency by artificially protecting inefficient firms who would otherwise be force to restructure.

8. Reflection activity

Identify whether a subsidy will always mean lower prices for consumers

This depends on price elasticity of need, as the diagrams in the class handout illustrate. The more than inelastic the demand bend the greater the consumer's gain from a subsidy. Indeed when demand is perfectly inelastic the consumer gains nigh of the do good from the subsidy since all the subsidy is passed onto the consumer through a lower price.

When demand is relatively price elastic, the principal effect of the subsidy is to increase the equilibrium quantity traded rather than pb to a much lower market place price.

Activity nine: Link to theory of knowledge

Wait again at the list of goods and services which your authorities subsidises and enquire the question: 'How many of those subsidised goods tin really exist chosen 'merit appurtenances' and hence benefit the citizens of that land?'

Activeness 10: Reflective activity - link to the cess

Typical paper i questions on this topic include:

Office (a)

Illustrate using an advisable diagram how a subsidy can increment the number of students applying to university. [ten marks]

Command term: Illustrate

This ways use a diagram to explain how a regime subsidy can increase the number of students applying to college or university.

Terms to ascertain: subsidy, MSC, MSB, external costs and benefits.

As the diagram illustrates, the equilibrium number of students entering university in a gratis market place would be represented by Q1. The equilibrium tuition cost at this level is P1. After the subsidy the price falls to P2 and at this lower cost the number of students applying to higher is Q2.

Q2 represents the socially optimum number of students where MSC = MSB. The subsidy finer internalises the externality, meaning ensuring that the social benefits enjoyed by society from higher student numbers are provided to students in the class of lower fees.

Part (b)

Using real life examples, evaluate the effectiveness of subsidies in encouraging the consumption of pedagogy and health services? [15 marks]

Command term: Evaluate

Key terms to define: subsidy, merit skillful, positive externality

Relevant real life examples include: nations who have been successful in raising access to both services through government intervention. Responses might consider, for example, the high life expectancy in many Western nations with subsidised healthcare compared to the US non-subsidised system. However, such an instance would likewise need to recognise that differences in wellness levels may also be a outcome of cultural / economic factors and that the The states, with one of the highest college education costs in the globe, still has a very high take up at academy.

Equally part (a) illustrates lower prices in the form of a subsidy will increase the consumption of the merit good to the socially optimum level, where MSC = MSB. Providing a subsidy internalises the externality and consumers end upwards paying the socially efficient price, which includes the external do good.

However at that place are criticisms of such a policy:

the opportunity cost of the subsidy payment - could the money used be better spent elsewhere
some economists argue that subsidies misconstrue market prices
the cost of a subsidy falls on the taxation-payer who themselves have derived no benefit from going to university
the subsidy tin can protect inefficient colleges and discourage them from making important cost cutting measures.

Paper three

Relevant questions from the paper three exam might include illustrating the impact of an indirect tax on a good or service, using a given set of data. Paper three questions on this topic might also require candidates to calculate the change in price / quantity demanded or the size of the consumer and producer surplus, after the provision of a regime subsidy.