Introduction to Taxes and Subsidies
Subsidies
Sometimes the government gives money out instead of taking it away... It's true, I swear!
1
concept
Subsidies
9m
Play a video:
Was this helpful?
Now, let's see how the effects of a government subsidy are actually very similar to the effects of attacks. So, remember when the government gives a subsidy, it's the opposite of attacks, right? With attacks, the government's taking away money from the market participants, where with the subsidy, the government gives money to a market participant, right? We're still gonna be dealing with that idea of a per unit subsidy, right? There's gonna be a subsidy on each unit sold. Um, So we call it essentially a reverse tax, right? Because instead of giving money there, it's almost like they're giving a negative tax, right? They've imposed a negative tax where they're going to give money away. So what you're gonna see is that we're actually gonna see very similar conclusions, but they're just kind of gonna happen. On the other side of the graph. First, we're gonna see that the party receiving the subsidy doesn't get the full benefit, right? So just like we saw with the tax, whoever paid the tax, there was the tax incidents to the consumer and the tax incidents to the producer. So they actually split that that burden of the tax between the two. We'll see the same thing with subsidies, where they're gonna split the benefit, and we're gonna see that the split, right, how it's split, it's not just gonna be 50 50 it's gonna depend on those price elasticity is just like we saw with demand, excuse me, With taxes, um And last we're gonna see this dead weight loss, right? With taxes, we saw a dead weight loss from under trading, right? The tax caused us to be at some quantity below equilibrium. A subsidy is gonna push us to a quantity past equilibrium, right? So we're gonna be over trading. And the idea there is that the resources that we spent over trading, um they they could have been spent somewhere else creating some other good and had a better purpose, right? So we over traded in this to create and it created a deadweight loss because we passed equilibrium. So that's how they're the same. We're also going to see that there's a couple of things that are different. First with the subsidy. Um Remember the tax shifted the curve to the left, right? If the consumers got tax, the demand curve shifted to the left, or we're going to see the opposite here, right? Because the government is actually giving money to the consumer or to the producer, we're gonna see the curve shift to the right by the amount of the tax. Okay? It's gonna shift to the right, by the amount. Excuse me, by the amount of the subsidy. Okay. And last, remember when we saw taxes, we saw that the price the buyer paid was different than the price the seller received, right? There were two different price And we're gonna see the same thing, two different prices, but now they're gonna be inverted, because since the government giving money, you're going to see that the price the seller receives is higher than the price the buyer pays, right, the buyer pays $5, and the government subsidizes an extra dollar. Now, the suppliers receiving six, right? So the suppliers receiving more money than the buyer paid because of that government money coming in. So, let's go ahead and see how the elasticity is, right? They're gonna they're gonna show us how the benefit gets split. Um So, we'll do that here on on the graphs. But I guess first, let's talk about the subsidy and like, let's look at it here on the graph first. So, we've got our standard kind of situation where we've got our P star, right? We had our equilibrium price and quantity, we've got our downward demand here and our upward supply, Right? And then the government steps in and it gives a subsidy, right in this amount, right? That's the amount of the subsidy right there. And we're gonna have to new prices now, right? Since they're gonna split? Or excuse me. Since the government's gonna put money in here, the price the seller receives? And the price the buyer pays are gonna be different now. So which one do you think is gonna be the price the supplier receives? And which one do you think is gonna be? Uh the amount that the buyer pays in the situation. So, remember that it's inverted right? Before we saw that the price the buyer paid was higher than the price the seller received. Well, in this case, it's gonna be the opposite. The price the buyer pays is gonna be less because of the subsidy. All right. And that also makes sense because if you look on this demand curve, the demand curve is the one that's touching the dot way down here, right? So that dot down here is going to be the price the buyers pay, because that's where it touches the demand curve. And right here, the price the seller receives is right up there touching the supply curve. Right? So there you see the different prices. And now let's go ahead and see how this benefit is split, right? So we've got that subsidy right there. So what do you think? Which pieces bigger? Right. We've got this big piece down here of the subsidy, And then this little piece of the subsidy over here. Right. So, before we make our conclusion, let's look at the shape of the curves. We've got the elastic supply and any elastic demand, right? Supplies, elastic. It looks like it's almost laying down, right? And the demand is elastic. It's almost standing straight up. Right? So with that in elastic demand, elastic supply, Who's gonna get more of the benefit? Well, it's this bottom piece, Right? But who does that bottom piece belong to when we're doing taxes? The bottom part was for the supplier, And the top part was for the consumer. Right? And that made sense because we're on the left side of the graph, but here, on the right hand side, it's actually the opposite. If you'll notice when we're on the right hand side of the graph, the demand curve is on the bottom and the supply curve is on top here. Right? So since the demand curves on the bottom, the bottom part there is for the consumers. So here the consumers are getting a big part of the benefit, and the suppliers are getting that little part of the benefit, right? And who was more an elastic here? The consumers, right? And the consumers got more benefit. So we're gonna see how this kind of relates to what we did with taxes. Uh But let's go ahead and confirm it on this right hand graph. And do one more example where now the supply is elastic and the demand is elastic. So let me get out of the way. So we can label the graph and stuff. And let's start here with our equilibrium. Right? We've got P. Star and this was R. Q. Star right here, Oh, and just to reiterate right in this, in this, in this first graph here, at the subsidy, right, this is the quantity that's going to be exchanged over here, right? The quantity. Um I'll put h the high quantity that's going to be exchanged because of the subsidy. We're trading past equilibrium. Right here on this graph, It's going to be out here, right? This is our gonna be our high quantity over here. Okay, so we've got our demand curve and our supply curve, right? And you can see that the supply is any elastic, it's almost standing straight up the elastic demand is almost laying down, Right? So, again, the government steps in, gives this subsidy right here, and how is it going to be split? I guess first. Let's put our prices for the buyer and price for the seller. So what do we got here again? We're gonna see that the price to the seller right there, where it's touching, the supply curve is way up there and down here, we've got the price to the buyer, right? A lower price? And then the government fills in that gap and gives the supplier is gonna have more money. Right? Okay, So let's go ahead and see how this one split. Right? So now we can see that this one is the small one down here, right? And this is the big one. And who's more any elastic in this case? The supplier, Right? And who's getting more of that benefit? The supplier, Right? Because the suppliers on the top part of this graph, the sub the supply curve is right here, Right? So that's the supplier side of the graph, and this is the consumer down here. Right? So, here, um we're seeing the same conclusion, right? Where any elastic party any elastic party is getting more benefit, right? And that's what we saw with tax, that any elastic party paid more tax. Okay, so, we're gonna see that we can make the same conclusion here, the curve that is more any elastic represents the group, who will receive more tax benefit, right? More any elastic more tax benefit. So, if the demand curve is more any elastic, excuse me, tax benefits, subsidy benefit. If the demand curve is more in elastic consumers get more benefit, and if the supply curve is more elastic, right, the suppliers get more benefit. So what do we see? We see that conclusion is gonna parallel what we saw with taxes. Whoever pays more tax gets more subsidy benefit, right? The more elastic party is going to get more tax, and they're also gonna pay more subsidy benefit or get more subsidy benefit. Okay, so that's how the subsidies kind of relate to the tax. You see there's a lot of similarities there. Alright, let's go ahead and go on to the next video.
2
Problem
ProblemA government wants to increase the use of solar panels by offering a $100 subsidy for each solar panel purchased. The addition of this subsidy will:
A
Increase the quantity supplied
B
Decrease the quantity supplied
C
Create a deadweight loss in the market for solar panels
D
Both (a) and (c)
3
Problem
ProblemThe government wants to help producers of a life-saving machine, so they introduce a $1,000 subsidy per machine produced. Assuming that demand for this machine is inelastic, the subsidy will:
A
Increase the price paid by consumers by $1,000
B
Increase the price paid by consumers by less than $1,000
C
Decrease the price paid by consumers by less than $1,000
D
Have no effect on the price paid by consumers