Subsidies

  • Subsidy:Subsidy: a reverse tax
    • Instead of taking money away from consumers (or producers), the government gives money to consumers (or producers)
  • Emphasized points:

  

  1. Who gets the subsidy doesn’t depend on who gets the check from the government
  2. Who benefits from a subsidy does depend on relative elasticities of demand and supply
  3. Subsidies must be paid for by taxpayers and they create inefficient increases in trade (deadweight loss)
  • With a tax, the price paid by buyers exceeds the price received by sellers
    • Subsidy reverses this
    • Price received by sellers exceeds the price paid by buyers
    • Difference is amount of subsidy
    • The subsidy = price received by sellers - price paid by buyers
  • Can still use wedge shortcut, but now push wedge from right side of diagram to left side
  • Subsidy means that the sellers are receiving more than the buyers are paying
    • Taxpayers make up the difference
    • The cost to the taxpayers is the amount of the subsidy times the number of units subsidized
  • Subsidy also creates a deadweight loss
    • Some non beneficial trades occur
  • Who gets the benefit of the subsidy:
    • Whoever bears the burden of a tax, receives the benefit of a subsidy
  • Edmund Phelps, a nobel prize winner strongly agrees with using wage subsidies to increase employment of low-wage workers
    • In his plan, firms would be subsidized for every low-wage worker they hire
    • Subsidy make hiring a low-wage worker even cheaper which increases demand for labor
  • Wage subsidies can be costly
    • Cost of subsidy is the subsidy amount times the number of workers who are hired under the program
  • Could have offsetting benefits to taxpayers, making their total cost less than it first appears
    • Phelps argues that if wages and employment among low-skilled workers were higher, welfare payments would be lower