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changes P* AND Q*
o increases price consumers are willing to pay for any given Q by the
amount of the subsidy
o PD decreases and PS increases
incidence of subsidy relies on relative price elasticity
o both parties benefit to varying degrees
o more inelastic the curve, the higher the benefit
inefficient as it causes excessive production/consumption that otherwise
wouldn’t have happened
o COP is greater than benefit gained by consumers
Subsidies to Consumers
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gain additional areas (F and E)
DWL due to excess production/consumption compared to equilibrium Q
Examples
- solar panel subsidies to promote clean energy
- childcare subsidies promote joining labour force
Subsidies to Producers
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equivalent to outward shift in supply
same changes to P* and Q* as a subsidy to consumers
Examples
- EU subsidies to agriculture
- pharmaceuticals production
- industrial policy- encourages industrialisation
Direct Govt Interventions
Price Controls
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used by govt to correct ‘unfair’ market outcomes
o eg rent control, minimum wage
Price Floor
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imposes minimum price above P*
creates surplus
Qd = quantity traded
Eg minimum wage
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Reduces CS
Either increases or decreases PS
Reduces TS
Minimum Wage
Benefits
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Benefits low-skilled labour by increasing wages
o Improves living standards and affordability
o Protects from exploitation
Reduces wage inequality
Costs
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Reduces demand for labour, creating unemployment
o Inefficient to have surplus labour
Increases COP for firms
o Increases prices for consumers
Less incentives to pursue higher education/skills training
Price Ceiling
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Imposes maximum price below P*
Creates shortage as suppliers are disincentivised to supply
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o Results in some buyers missing out- less efficient
At Qs, MB > MC
Suppliers always get lower PS
Consumers either get higher or lower CS
Decreases TS
Quotas
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Imposes max quantity traded
Binds at level of Q traded, regardless of whether it is above or below Q*
Creates kinked S curve
Pquota becomes whether QD is at the quota amount