AGRICULTURE AND AGRICULTURAL POLICY Subsidies – effects on price and output – the incidence of a subsidy – Subsidy is an amount paid for every unit produced. It reduces the cost to the farmer of supplying the good and moves the supply curve down and out.

Effect of subsidies on foodstuffs in which the country is self-sufficient 1 P QO D QeQe PePe S

Effect of subsidies on foodstuffs in which the country is self-sufficient P QO D QeQe PePe S + subsidy S

Effect of subsidies on foodstuffs in which the country is self-sufficient P QO D Q1Q1 QeQe PePe P1P1 S + subsidy S Note at P e farmers willing to supply Q 2, But then Supply exceeds demand Q2Q2 so price must fall to P 1

Effect of subsidies on foodstuffs in which the country is self-sufficient 2 P QO D Q1Q1 QeQe PePe PgPg P1P1 S + subsidy S Subsidy

Effect of subsidies on foodstuffs in which the country is self-sufficient P QO D Q1Q1 QeQe PePe PgPg P1P1 S + subsidy S Subsidy Note two parts to the subsidy in this example: 1.Getting higher price P g 2.But also selling more, S 1 Depends on p D

Effect of subsidies on foodstuffs which are partly imported P Q O D PwPw S EU S world

Effect of subsidies on foodstuffs which are partly imported P Q O D QdQd PwPw S EU S world QS1QS1 Imports

Effect of subsidies on foodstuffs which are partly imported P Q O D QdQd PwPw S + subsidy S EU S world QS1QS1

Effect of subsidies on foodstuffs which are partly imported P Q O D QS2QS2 QdQd PwPw S + subsidy S EU S world QS1QS1 Imports

P Q O D QS2QS2 QdQd PwPw PgPg S + subsidy S EU S world QS1QS1 Effect of subsidies on foodstuffs which are partly imported

P Q O D QS2QS2 QdQd PwPw PgPg S + subsidy S EU S world QS1QS1 Effect of subsidies on foodstuffs which are partly imported