HttpeconomicsaboutcomodregulationssAnalysisOfASubsidy11htmstepheadinghttpswwwgooglecommyurls
http://economics.about.com/od/regulation/ss/Analysis-Of-A-Subsidy_11.htm#step-heading https://www.google.com.my/url?sa=t&rct=j&q=&esrc=s&source=web&cd=11&cad=rja&uact=8&ved=0CFIQFjAK&url=http%3A%2F%2Fwilcoxen.maxwell.insightworks.com%2Fpages%2F1896.html&ei=1aFhVOWrCsicuQSf14LwBQ&usg=AFQjCNG8zetxgbyprQOkaf_Vk2CSJcLq5Q&bvm=bv.79189006,d.c2E When a government decides that a good is beneficial to all of its citizens and wants to stimulate consumption of that good, it may distribute subsidies to the consumers. The subsidy, which is essentially extra spending money specifically for that good, artificially shifts the consumer’s demand curve outward (upward or rightward) and creates a greater demand for the good.
An example of a subsidy is the $40 coupons the U.S. government is issuing to consumers for digital-TV converter boxes in anticipation of the switch from analog television broadcasts to digital television. This subsidy to the consumer is illustrated in figure 4.f.1 by a vertical shift upwards of the demand curve by $40, from D0 to DS. As a result of the subsidy, the equilibrium consumption of digital-TV converter boxes shifts from Q* to QS. Instead of paying the original equilibrium price of P*, consumers now pay the lower PB while producers, instead of receiving P* from the sale of the device, now receive the higher PS. Consumers are seemingly better off, being able to purchase additional units for less, while producers sell more and receive a higher price in return. Cost-benefit analysis can be used to evaluate the efficiency of a subsidy.
Before Subsidy
After Subsidy
Change
Consumer Surplus
AB
ABDE
+D+E
Producer Surplus
GD
GDBC
+B+C
Government Spending
0
BCDEF
-B-C-D-E-F
Net Change
-F
Table 4.f.1
From the cost-benefit analysis in table 4.f.1, we see that consumers gain areas D and E in consumer surplus. Similarly, producers gain areas B and C in producer surplus. Judging based on consumers and producers alone, it seems as though subsidies are
An example of a subsidy is the $40 coupons the U.S. government is issuing to consumers for digital-TV converter boxes in anticipation of the switch from analog television broadcasts to digital television. This subsidy to the consumer is illustrated in figure 4.f.1 by a vertical shift upwards of the demand curve by $40, from D0 to DS. As a result of the subsidy, the equilibrium consumption of digital-TV converter boxes shifts from Q* to QS. Instead of paying the original equilibrium price of P*, consumers now pay the lower PB while producers, instead of receiving P* from the sale of the device, now receive the higher PS. Consumers are seemingly better off, being able to purchase additional units for less, while producers sell more and receive a higher price in return. Cost-benefit analysis can be used to evaluate the efficiency of a subsidy.
Before Subsidy
After Subsidy
Change
Consumer Surplus
AB
ABDE
+D+E
Producer Surplus
GD
GDBC
+B+C
Government Spending
0
BCDEF
-B-C-D-E-F
Net Change
-F
Table 4.f.1
From the cost-benefit analysis in table 4.f.1, we see that consumers gain areas D and E in consumer surplus. Similarly, producers gain areas B and C in producer surplus. Judging based on consumers and producers alone, it seems as though subsidies are