A revision presentation on the economics of producer and consumer subsidies as forms of government intervention in markets. There are a number of up to date examples highlighted together with an evaluation of the benefits and costs of subsidy payments. This is designed as a revision aid for unit 1 students taking their microeconomics papers.

1. Producer and
Consumer
Subsidies
AS Micro
Revision
November
2013

2. Producer Subsidies
• A subsidy is a payment by the government to
suppliers that reduce their costs of production
and encourages them to increase output
• State subsidises are financed from general
taxation or by borrowing
• The subsidy causes the firm's supply curve to
shift to the right
• The amount spent on the subsidy is equal to
the subsidy per unit multiplied by total output

3. Producer Subsidies
• A subsidy is a payment by the government to
suppliers that reduce their costs of production
and encourages them to increase output
• State subsidises are financed from general
taxation or by borrowing
• The subsidy causes the firm's supply curve to
shift to the right
• The amount spent on the subsidy is equal to
the subsidy per unit multiplied by total output

4. Producer Subsidies
• A subsidy is a payment by the government to
suppliers that reduce their costs of production
and encourages them to increase output
• State subsidises are financed from general
taxation or by borrowing
• The subsidy causes the firm's supply curve to
shift to the right
• The amount spent on the subsidy is equal to
the subsidy per unit multiplied by total output

5. Producer Subsidies
• A subsidy is a payment by the government to
suppliers that reduce their costs of production
and encourages them to increase output
• State subsidises are financed from general
taxation or by borrowing
• The subsidy causes the firm's supply curve to
shift to the right
• The amount spent on the subsidy is equal to
the subsidy per unit multiplied by total output

6. Examples of subsidies
• A payment on the factor cost of a product – e.g. a
guaranteed minimum price offered to farmers such as
under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs
used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business
– e.g. a grant given to cover losses in the rail industry
or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of
the credit crunch
• Financial assistance (loans and grants) for businesses
setting up in areas of high unemployment

7. Examples of subsidies
• A payment on the factor cost of a product – e.g. a
guaranteed minimum price offered to farmers such as
under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs
used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business
– e.g. a grant given to cover losses in the rail industry
or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of
the credit crunch
• Financial assistance (loans and grants) for businesses
setting up in areas of high unemployment

8. Examples of subsidies
• A payment on the factor cost of a product – e.g. a
guaranteed minimum price offered to farmers such as
under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs
used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business
– e.g. a grant given to cover losses in the rail industry
or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of
the credit crunch
• Financial assistance (loans and grants) for businesses
setting up in areas of high unemployment

9. Examples of subsidies
• A payment on the factor cost of a product – e.g. a
guaranteed minimum price offered to farmers such as
under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs
used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business
– e.g. a grant given to cover losses in the rail industry
or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of
the credit crunch
• Financial assistance (loans and grants) for businesses
setting up in areas of high unemployment

10. Examples of subsidies
• A payment on the factor cost of a product – e.g. a
guaranteed minimum price offered to farmers such as
under the old-style Common Agricultural Policy (CAP).
• An input subsidy which subsidises the cost of inputs
used in production – e.g. an employment subsidy
• Government grants to cover losses made by a business
– e.g. a grant given to cover losses in the rail industry
or a loss-making airline
• Bail-outs e.g. for financial organisations in the wake of
the credit crunch
• Financial assistance (loans and grants) for businesses
setting up in areas of high unemployment

11. Diagrams matter!
Diagram must haves
Fully labeled
Original and new equilibrium
Demand and supply the correct way round
Well explained – you must explain why the
curve has shifted, in detail
Think about the elasticity – e.g. oil has
inelastic demand and supply

12. Analysing the effects of a subsidy
Costs and
Benefits
Supply pre subsidy
A
Supply post subsidy
Demand
B
Output

13. Analysing the effects of a subsidy
Costs and
Benefits
Supply pre subsidy
A
Supply post subsidy
C
Demand
B
D
Output

14. Analysing the effects of a subsidy
Costs and
Benefits
Supplier
E
receives C
Supply pre subsidy
A
Supply post subsidy
Consumer
C
pays B
Demand
B
D
Output

15. Analysing the effects of a subsidy
Costs and
Benefits
Supplier
E
receives C
Supply pre subsidy
A
Supply post subsidy
Consumer
C
pays B
Subsidy
payment
Demand
B
D
Output

16. Consumer and producer surplus
Price
Market price and quantity before the subsidy is P1 and Q1
S1 pre subsidy
S2 post subsidy
P1
Demand
Q1
Output

17. Consumer and producer surplus
Price
Consumer surplus is area ABP1
S1 pre subsidy
A
P1
B
S2 post subsidy
Demand
Q1
Output

18. Consumer and producer surplus
Price
Producer surplus = area P1BC
S1 pre subsidy
A
P1
B
C
S2 post subsidy
Demand
Q1
Output

19. Consumer and producer surplus
Price
The subsidy causes a fall in market price to P2
S1 pre subsidy
A
P1
B
S2 post subsidy
P2
C
Demand
Q1 Q2
Output

20. Consumer and producer surplus
Price
Consumer surplus increases to area ADP2
S1 pre subsidy
A
P1
B
S2 post subsidy
D
P2
C
Demand
Q1 Q2
Output

21. Consumer and producer surplus
Price
Producer surplus boosted through the subsidy payment
S1 pre subsidy
A
P3
P1
E
B
S2 post subsidy
D
P2
C
Demand
Q1 Q2
Output

22. Arguments for Subsidies
Controlling price
inflation e.g. food prices
Boost employment
especially in poor areas
Improve human capital
and productivity
Protect strategic /
infant industries
Promote growing
demand for renewables
Improve affordability for
low-income families

23. Arguments for Subsidies
Controlling price
inflation e.g. food prices
Boost employment
especially in poor areas
Improve human capital
and productivity
Protect strategic /
infant industries
Promote growing
demand for renewables
Improve affordability for
low-income families

24. Arguments for Subsidies
Controlling price
inflation e.g. food prices
Boost employment
especially in poor areas
Improve human capital
and productivity
Protect strategic /
infant industries
Promote growing
demand for renewables
Improve affordability for
low-income families

25. Arguments for Subsidies
Controlling price
inflation e.g. food prices
Boost employment
especially in poor areas
Improve human capital
and productivity
Protect strategic /
infant industries
Promote growing
demand for renewables
Improve affordability for
low-income families

26. Arguments for Subsidies
Controlling price
inflation e.g. food prices
Boost employment
especially in poor areas
Improve human capital
and productivity
Protect strategic /
infant industries
Promote growing
demand for renewables
Improve affordability for
low-income families

27. Arguments for Subsidies
Controlling price
inflation e.g. food prices
Boost employment
especially in poor areas
Improve human capital
and productivity
Protect strategic /
infant industries
Promote growing
demand for renewables
Improve affordability for
low-income families

28. India and Food Subsidies
India is introducing a policy
aimed at providing subsidised
food to two thirds of the
population.
The new food security law will
provide five kilos of cheap grain
every month to nearly 800
million Indians.
Can a new food law solve as
long-running problem or will it
drain the country's finances?
The government says that
money is not a problem.

29. Thailand and Rubber Subsidies
Thailand has doubled subsidies to rubber farmers.
The Thai cabinet on Tuesday approved the
assistance of 21.2bn baht ($659m) to rubber
smallholders, after a dispute that has led to
shipment delays and to scuffles between police
and farmers demonstrating in the south.
Thailand is a leading world exporter of both
rubber and rice, but has faced problems managing
both industries as state financial support
programmes have led to the build-up of
stockpiles.
The Thai government’s expanding commodity
subsidy programme is in part an effort to bolster
the income of farmers at a time of falling world
prices. Natural rubber prices have almost halved
since the peak of February 2011
Source: News reports, October 2013

30. Is there a case for a NEET subsidy?
• The number of young people
not in education, employment
or training in the UK was 1.07m
people aged 16 to 24 in the 3rd
quarter of 2013
• Youth Contract launched in 2011
– it offers internships, work
experience and subsidies for
businesses to take on new
employees.
• But few companies are taking up
the offer of wage subsidies. In
the first year of the scheme –
designed to fund jobs for
160,000 people over three years
– it was used to employ fewer
than 5,000 young people
Source: News reports, Oct 2013

31. Child care subsidies – a way forward?
Britain ranks 15th out of 25 OECD nations for maternal
employment, languishing behind Germany, France,
Canada and the USA
In New Zealand – the government offers subsidies for inhome nanny services. The childcare rebate (subsidy)
currently provides parents with 50% of their childcare
costs up to a total of $7,500 a year for each child.
With the UK childcare voucher scheme, an average
family with two working parents claiming vouchers can
save up to £1,866 a year towards their childcare costs if
both parents buy vouchers but only if their employer has
signed up to a scheme

32. End to UK biomass subsidy

33. Biomass subsidies have increased demand
for wood, pushing prices higher
Price of
Timber
S1
P2
P1
D2
D1
Q1
Q2
Quantity
of Timber

35. Evaluation – Criticism of Subsidies
Distortion of market
prices / incentives
Risk of fraud from
subsidy payments
Expensive – high cost
for taxpayers
Inequitable – many rich
people may benefit
Environmental damage
Protects inefficient
businesses

36. Evaluation – Criticism of Subsidies
Distortion of market
prices / incentives
Risk of fraud from
subsidy payments
Expensive – high cost
for taxpayers
Inequitable – many rich
people may benefit
Environmental damage
Protects inefficient
businesses

37. Evaluation – Criticism of Subsidies
Distortion of market
prices / incentives
Risk of fraud from
subsidy payments
Expensive – high cost
for taxpayers
Inequitable – many rich
people may benefit
Environmental damage
Protects inefficient
businesses

38. Evaluation – Criticism of Subsidies
Distortion of market
prices / incentives
Risk of fraud from
subsidy payments
Expensive – high cost
for taxpayers
Inequitable – many rich
people may benefit
Environmental damage
Protects inefficient
businesses

39. Evaluation – Criticism of Subsidies
Distortion of market
prices / incentives
Risk of fraud from
subsidy payments
Expensive – high cost
for taxpayers
Inequitable – many rich
people may benefit
Environmental damage
Protects inefficient
businesses

40. Evaluation – Criticism of Subsidies
Distortion of market
prices / incentives
Risk of fraud from
subsidy payments
Expensive – high cost
for taxpayers
Inequitable – many rich
people may benefit
Environmental damage
Protects inefficient
businesses

41. Do
subsidies
hold back
innovation?

42. Surpluses
can lead to
excess
capacity
and long
term
damage –
the EU
fishing
industry is
an example

43. Short term and long term effects
“In general, subsidies
should be employed to
change behaviour and
solve specific problems
rather than to serve as a
long-term crutch for
producers. If not, it will
stifle innovation and make
producers both less
competitive and more
dependent on
government.”
Source: Jason Clay, Guardian,
August 2013

44. Renewable Energy & Solar Subsidies

45. Consumer Subsidies: Feed-In-Tariffs

46. Using cross-elasticity of
demand, assess the likely
relationship between the
demand for solar panels
and the price of
household electricity
from non-renewable
sources

47. Rising electricity
prices
Incentives to
switch to
renewable energy
There is a cost to
switching
Rising market
demand for solar
panels

48. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar
panels
S1
P1
D1
Q1
Quantity

49. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar
panels
S1
P1
D1
D1
Q1
Quantity

50. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar
panels
S1
P2
P1
D2
D1
Q1
Quantity

51. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar
panels
S1
P2
P1
S2
D2
D1
Q1
Quantity

52. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar
panels
S1
P2
P1
S2
P3
D2
D1
Q1
Quantity

53. Despite a strong rise in demand, the market price of solar panels
has fallen in recent years. With the help of a supply and demand
diagram, explain why this can have happened
Price of
solar
panels
S1
P2
P1
S2
P3
D2
D1
Q1
Q2

54. Evaluate the argument for
government intervention in the
market for solar panels to encourage
the growth of renewable energy
rather than allowing free market
forces to operate

55. The case for solar subsidies
Promotes renewable energy and
lowers oil dependency
Creates thousands of new jobs – + a
positive multiplier effect
Cuts bills for consumers & councils
Economies of scale if the take-up of
panels increases

56. Solar subsidies – critical evaluation
Subsidies benefit richer households
Limited effectiveness for money
spent – opportunity cost
Mis-selling of solar panels especially
to vulnerable households
Most solar panels are imported

57. Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ1
@tutor2u
@tutor2u-econ