Economics subsidies and minimum pricing

Subsidy

A subsidy is an ammount of money given directly to firms by the government to encourage production and consumption

Advantages of minimum pricing

Producers know in advance the price they will receive for their product-establishes greater output and investment

Advantages of subsidies

1)reduces cost of capital development 2)can boost living standards 3)encourages labour and industrial mobility 4)can reduce the production of negative externalities

Effect on producers

1)they stabilise and increase producers incomes resulting in investment and employment

Purpose of subsidies

1)to solve market failure-subsidies increase supply leading to reduced prices 2)to keep prices down and control inflation 3)reduce the cost of capital investment projects

Effect on consumers

1)can reduce consumption of a good which is harmful to consumers 2)might not be effective of goods with an inelastic PED 3)reduces fluctuations in food prices

3 examples of government subsidies

1)child care for working families 2)biofuel subsidies for farmers 3)food and fuel

Effect on government

1)government intervention distorts the price mechanism-excess supply 2)food surpluses can be used as international aid in developing countries 3)national minimum wage can reduce exploitation of labour while increasing incentives to work

Disadvantages of minimum pricing

1)minimum price set too high-results in surplus 2)schemes involve cost of storage 3)inefficient allocation of resources

Disadvantages of subsidies

1)opportunity cost to government 2)may encourage inefficiency 3)may subsidies less reliable forms of energy

Example of minimum price schemes

Commodity markets to protect the income of farmers-CAP Labour markets to prevent the exploitation of workers-National minimum wage

Impact of PED on subsidies

It will impact how much the price falls by and how much the quantity demanded change

Producer income

Min price x Q2

Consumer spending before subsidy

P1 x Q1

Consumer spending after subsidy

P2 x Q2

Total area of government expenditure on subsidy

P2, P3, X, Y (box)

Actual government expenditure on the subsidy

P3-P2 x Q2

Minimum prices

The lowest price a good is allowed to be sold for/a floor price