21/09/15
Lesson 2-Subsidies
Learning Objective: I can define subsidy (international trade) and list the stakeholders affected.
DA: What's the purpose of the subside and illustrate it's application. Subsidy-An amount of money paid by the government to a firm, per unit of output.
|
|
Pre Subsidy:
|
As with tariff, Q1-Q3 tons of wheat are now produced by relatively inefficient domestic farmers (efficient foreign farmers).
- Foreign farmers would produce subsidy quantity for min revenue of b
- Domestic farmers min revenue b+g
- Thus, g represents the inefficiency of domestic farmers and misallocation of resources. More of the world's resources are being used to produce the wheat than are necessary (dead-weight/welfare).
- No loss of consumer surplus, because price doesn't change.
- Consumer are indirectly affected as governments will used tax revenues to fund subsidies.
- Higher taxes, opportunity cost in terms of reduced government spending on other things.