Subsidies, Min, max price and Buffer Stocks

what is a subsidy

payment by the government to producers to lower cost of production (e.g) medicine, its purpose is to lower cost of production and lower price

what will govt use a subsidy for

to promote goods that have a positive effect on society, merit goods

what direction does a supply curve shift with a subsidy

to the right

what are reasons for the price of a subsidy

• to keep the price of essentials affordable

• to encourage consumption of merit goods

• to contribute to a more equal distribution of income

• to provide services that will not be provided by the private sector

• to raise producer incomes: farmers

• to encourage exports

• reduce dependence on imports.

what is the graph for a subsidy

price falls to P1 and Qty increases to Q1

aim of subsidy has been achieved, lower price and increased qty traded

what are some implications from tax

• it is paid from tax - there is an opportunity cost

• it is a blanket payment to producers, it is not linked to their incomes or the ability to pay their expenses. are we paying firms that don’t really need it

• producers in the long term will become inefficient bc they are relying on the subsidies to pay for their costs

where are maximum price controls imposed

below equilibrium price

what are some examples of govt max price control

staples like foods, bread, rice, etc

rents

utilities like electricity, water, gas etc

bus fares

should govt use maximum price as a short term or long term measure

short term measure

graph for maximum price and explanation

• if the price is too high and the product/service is unaffordable, govt imposes a maximum price P1

• price is lower and more is demanded

• there is now a shortage of Q1-Q2 max prices will create shortages

• Since price is low, too few resources are allocated to production of goods since suppliers do not gain enough profit from lower prices

where will a govt impose a minimum price

above equilibrium price

why will govt impose a minimum price

to protect farmers at a time where commodity is falling

what is the graph for minimum price