BEA Week 6

Subsidies

Subsidy: payment from the government to producers that reduces production costs & increases supply

Ø  Governments pay subsidies to:

o   Encourage production of a good or service e.g. healthcare, education

o   Increase competitiveness of exports e.g. EU agriculture subsidies

o   Increase quantity demanded of a good e.g. EVs

o   Keeps workers employed e.g. Covid-19 Wage Subsidy

Ø  When a government pays producers a subsidy, the supply curve shifts down (right) by the amt. of the subsidy

o   E.g. a $20 subsidy = supply curve shifts down $20

o   This is because subsidies effectively lower firms’ cost of production, meaning they will accept lower prices and still make profit

Ø  Subsidies decrease prices of goods, so both consumers and producers in the market benefit

Ø  Subsidies are effectively paid from taxes a government receives from its taxpayers

o   Taxpayers are limited in their ability to pay taxes, which limits the government’s ability to pay subsidies

How a Subsidy Works (Referencing the Graph Above)

1.      Consumers are offered a good at $30 and buy it for $30

2.      Producers get paid $50 to sell the good, $30 from the consumer and $20 from the government

3.      Producers get the price they need to supply 6,000 goods

4.      Consumers increase quantity demanded due to the good being more cheaper

5.      Government pays $120,000 in total to subsidise 6,000 goods (6,000 x $20)

Taxation

Ø  Producers pay indirect taxes to the government on each good they produce

Ø  Indirect taxes decrease supply by the amt. of tax, i.e. the opposite effect to a subsidy

o   E.g. a $2 per good tax will shift the supply curve upwards (left) by $2

Ø  Indirect taxes are mostly imposed to create income for the government or to discourage the consumption of harmful products (alcohol, cigarettes)

GST: Goods and Services Tax, 15%, the most common indirect tax

Other indirect taxes are imposed on

Ø  Carbon, fuel, import duties