Public Policy Analysis MPA 404 Lecture 30

Previous Lecture Brief o Continuation of the graphical analysis of everyday policies o The probable effects of education vouchers o The analysis of price floors and price ceilings, and their negative impacts o The podcast about GDP as a measure of well being.

Examples continued A brief on why is it important to be aware of the impact of price changes and a good analysis? Quiet a lot of government policies are centered on helping out the society or giving people relief from inflation. For example, subsidies on electricity and petrol are common. And these involve billions of rupees. So if the intended benefits do not reach the group of people (subsidies are specifically designed to help out the poor people in terms of purchasing power) for whom they are intended, then it is a tremendous waste of resources. Take the example of electricity subsidies. As we will read in a paper (as part of reading for one of the three debates), the government’s subsidies end up hurting the poor and helping the rich and upper middle class (for whom the subsidies were not intended). This is so because any reduction in the price of electricity due to a subsidy invites an increase in the use of electricity, most of it coming from use of heavy appliances like AC, Microwaves, Refrigerators, etc). These are owned by the wealthy and the middle class, not the poor ones. So the end result is that of the total increase in

consumption, the poor people’s consumption of electricity barely increases. Thus the main beneficiary of the billion rupee government largesse turns out to be the wrong people. This is why it is so important to analyze what is happening as a result of the price change, and who is affected to what extent? A wrong policy will result in the waste of billions of rupees. A similar picture will be revealed when we go through one of the studies that discusses the regulation of energy prices in Pakistan. The end result, as the paper concludes, is that it excludes even those people who can afford energy at the market rates, something we saw in the price ceiling example in NY. Are minimum wage policies practical? The following reading will shed light on it.

Examples continued. Wheat price support

Its clear from the graphical analysis that price support for wheat is the same as a price ceiling, and the benefits tend to accrue to the producer in this case because wheat’s demand is highly inelastic. Even if there is a reduction in consumption, it will be very little. Notice another thing here. There is a transfer of wealth taking place too, from consumers to the producers in the form of increased prices that the consumer’s have to pay for consumption of wheat. This is side effect of the government price support systems: a transfer of wealth from one group to the other. Another major setback or negative of this kind of program is that the additional production is bought by the government, which implies more expenditure. Also, there is an over allocation of resources. Farmers, who might be producing other agricultural products, would also prefer to produce wheat due to its higher price. Think of ethanol subsidies and what it did to corn production.