Year 13 Economics Subsidy

Questions Which farmers are being given the subsidies? Who is (was) Chirac? How does the cartoon define subsidies? What is the cartoonist implying by using a pig trough? Is the cartoonist supportive of the use of subsidies?

Answers European farmers in particular the French farmers He was the President of France 1995 to 2007 As free cash handed out to producers That European farmers are insatiable (greedy as a pig) in their desire for subsidies No: By comparing the hard working Australian outback farmer to the greedy European farmers the cartoon implicitly implies the waste caused by subsidies

Definition A subsidy is a payment by the government to a producer in order to lower the cost of production of the producer The goal of the government with the introduction of the subsidy is to lower the price and increase the quantity produced / consumed

Analysis A subsidy decreases the cost of production so supply will shift to the right (S1) Price will decrease to P1 and quantity will increase to Q1 Consumer surplus will increase Producer surplus will also increase The cost of the subsidy to the government is therefore partly taken with gains to consumer and producer surplus. A deadweight loss will be created P$ Q D S Pe Qe S1 Q1 P1

Advantages of Subsidies The advantage of a subsidy over a price control is that a subsidy will achieve the government aim of increasing equilibrium quantity without a shortage as there would be with a maximum price control. Above The new Auckland University Business School’s building built with private and public funds

Disadvantages of a Subsidy The disadvantage of a subsidy is that it may be very expensive for the government. Money spent on a subsidy can not be used elsewhere. As a intervention into the marketplace a deadweight loss will be incurred. Producers will increase there production even if the market does not require the product – perhaps even causing environmental damage from over production

Questions Which countries or group of countries are represented by the two people holding the banner? Which countries are shown to have the dominating position in trade negotiations? What does the response “up to a point” mean in the discussion regarding free trade? Why have I used cartoons that illustrate international issues surrounding subsidies and not New Zealand concerns?

Answers The third world and Australia (represented by John Howard) The United States, Europe and Japan The US, Europe and Japan want free trade in those goods they have a comparative advantage with but do not want free trade in agricultural products where the developing world and Australia plus New Zealand have a comparative advantage New Zealand subsidies in the 2007 year totalled $589 million dollars, as compared to the European Common Agricultural policies (CAP) which gave subsidies totalling €44billion to its farmers. Since 1984 New Zealand has systematically reduced the subsidies it has given to its agricultural and manufacturing industries.

A Subsidy with an Inelastic Demand Curve A subsidy will increase supply to S1 The price the consumer’s pay will decrease and the quantity will increase, while the price the producer’s receive will increase. With an inelastic demand curve the incidence of the subsidy will benefit the consumer more than the producer Deadweight loss will still be incurred P$ Q D S 5 50 S1 3 6 55

A subsidy with an Elastic Supply Curve A subsidy will increase supply to S1 The price the consumer’s pay will decrease and the quantity will increase, while the price the producer’s receive will increase. With an elastic demand curve the incidence of the subsidy will benefit the producer more than the consumer Deadweight loss will still be incurred P$ Q D S 5 50 S1 5.50 8.50 60