What do subsidies do to supply and demand

Call for proposals — How to apply. Future events Past events Events policy. Projects Publications. Contents Introduction Key messages Demand-side subsidies Supply-side subsidies Tackling fundamental housing market constraints The economics of subsidies: Supply and demand diagrams Recommended further reading.

The economics of subsidies: Supply and demand diagrams The effect of demand and supply-side subsidies on the housing market can be analysed through supply and demand graphs. Demand-side subsidies When housing providers are unable to respond to price rises by supplying more housing e. This effect can be seen in Figure 3 below. The impact of subsidies A subsidy is a payment made to firms or consumers designed to encourage an increase in output.

Figure 1 Impact of a subsidy The amount of the subsidy is shown by the gap between the supply curves. This is true for when quantity is decreased and when it is increased. Taxes and subsidies are more complicated than a price or quantity control as they involve a third economic player: the government.

As we saw, who the tax or subsidy is levied on is irrelevant when looking at how the market ends up. Note that the last three sections have painted a fairly grim picture about policy instruments. This is because our model currently does not include the external costs economic players impose to the macro-environment pollution, disease, etc. These concepts will be explored in more detail in later topics. In our examples above, we see that the legal incidence of the tax does not matter, but what does?

To determine which party bears more of the burden, we must apply the concept of relative elasticity to our analysis. Which areas represent the loss to consumer AND producer surplus as a result of this tax? Which areas represent the gain in government revenue as a result of this tax? If government introduces a constant per-unit tax on socks, then which of the following statements is FALSE, given the after-tax equilibrium in the sock market?

Assume a downward-sloping demand curve for socks. If a subsidy is introduced in a market, then which of the following statement is TRUE? Assume no externalities. Which of the following statements about the deadweight loss of taxation is TRUE? Which of the following correctly describes the equilibrium effects of a per-unit tax, in a market with NO externalities?

Which of the following correctly describes the equilibrium effects of a per unit subsidy? Consider the supply and demand diagram below. Assume that: i there are no externalities; and ii in the absence of government regulation the market supply curve is the one labeled S1. Skip to content Learning Objectives By the end of this section, you will be able to: Distinguish between legal and economic tax incidence Know how to represent taxes by shifting the curve and the wedge method Understand the quantity and price affect from a tax Describe why both taxes and subsidies cause deadweight loss.

Why is Government Included in Market Surplus In our previous examples dealing with market surplus, we did not include any discussion of government revenue, since the government was not engaging in our market. Glossary Economic Tax Incidence the distribution of tax based on who bears the burden in the new equilibrium, based on elasticity Legal Tax Incidence the legal distribution of who pays the tax Subsidy a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction It is often to remove some type of burden, and it is often considered to be in the overall interest of the public.

Exercises 4. The price falls to Pn and the quantity rises to Qn. The sellers gain area A in new producer surplus. The buyers, who now pay a lower price, gain area B in consumer surplus.