<2.7.5 SUBSIDIES>

• SUBSIDIES (In the IB syllabus) refer to 'FIXED PAYMENTS PER UNIT OF OUTPUT MADE BY THE GOVERNMENT TO FIRMS', called 'SPECIFIC-SUBSIDIES'.

• TO INCREASE INCOMES OF PRODUCERS: Subsidies have the effect of increasing the revenues of producers. Therefore, governments often grant subsidies to particular producers whose revenues (and therefore incomes) they would like to support. This is most commonly done for producers of agricultural products.

• TO MAKE CERTAIN GOODS (NECESSITIES) AFFORDABLE TO LOW-INCOME CONSUMERS: Subsidies have the effect of lowering the price of the good that is paid by consumers, thus making the good more affordable. For example, a government may wish to make a food staple (such as bread or rice) more affordable to low-income earners and can do so by granting a subsidy to producers of the good.

• TO ENCOURAGE PRODUCTION & CONSUMPTION OF MERIT GOODS that are believed to be desirable for consumers. A subsidy has the effect of increasing the quantity of a good produced and consumed. If a government wishes to encourage consumption of a good because it is considered to be desirable (for example, education, vaccinations), it can use a subsidy to achieve this.

• TO SUPPORT THE GROWTH OF PARTICULAR INDUSTRIES: Since subsidies have the effect of increasing the quantity of output produced, if granted to firms in a particular industry, they support the growth of that industry. For example, subsidies to the solar industry are intended to promote the growth of solar power, subsidies to ethanol production are intended to promote the production of biofuels. Other examples include chemicals, textiles, steel, fossil fuels and many more.

• TO ENCOURAGE EXPORTS OF PARTICULAR GOODS: Since subsidies lower the price paid by consumers, they are sometimes granted on goods that are exported (sold to other countries), since lower export prices increase the quantity of exports.

• TO IMPROVE THE ALLOCATION OF RESOURCES: (reduce allocative inefficiencies) by correcting positive externalities. It was noted above that market imperfections prevent the achievement of allocative efficiency; in some cases (such as when there are positive externalities), it may be possible to use subsidies to improve allocative efficiency.

• The IB version of subsidies refers to a subsidy given to the PRODUCER BEFORE THEY SELL THE GOOD/SERVICE AT A LOWER PRICE however in many cases, the subsidy is given to the CONSUMER AFTER THEY BUY THE GOOD/SERVICE in the form of a REBATE, for example, the rebate given to customers who purchase EVs TESLA REBATE SINGAPORE

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TASK: DRAW DIAGRAMS TO PROVE THE FOLLOWING:

1) If PED is MORE ELASTIC than PES, the SMALLER the CONSUMER BENEFIT and the LARGER the PRODUCER BENEFIT

2) If PED is MORE INELASTIC than PES, the LARGER the CONSUMER BENEFIT and the SMALLER the PRODUCER BENEFIT