Discuss whether governments should subsidies food prices.
A Subsidy is a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low. L1 Market failure is any and every time that a free market (left to its own devices and totally free from government interventions) fails to lead to the best or optimum use of the scarce resources or factors of production. L1 Merit goods such as food products will be always under produced in the free market, why? so subsidies will help to correct this, as it will increases the consumption of food products. You must explain why by considering actual benefit and perceived benefit.
If government starts to subsidize food, then the price of food will go down, why? because it will become cheaper to produce it, therefore the supply will increase.
Diagram for subsidy:
Subsidy will reduce the price that the firm needs to encourage it to supply certain quantities.
It will shift the supply curve downwards by the amount of the subsidy. If a firm was willing and able to supply a certain quantity at P2 but now gets a per unit subsidy then it would be willing and able to supply that quantity at P1. Good
Consumers pay a lower price, which will make quantity demanded increase, as we are moving along the demand curve.
The equilibrium quantity in the market is higher so more factors are used in the industry now than before.
Government has had to pay a subsidy of P1-P2
Firms also receive a higher price for the good, so therefore receive higher revenue. And they are willing and able to expand supply
Subsidies are easy to apply and relatively quick to change. Moreover, it can be given at different rates for different goods, so the higher rate on goods that the government really want to encourage. Government, should subsidies food products, because food has positive externalities, which means it’s social benefit will be greater than the private benefit. Explain why for all foods. I am not sure that it does …Also, the free market fails to produce the correct quantity of positive externalities, so they will be under produced in the free market so government should encourage the supply by subsidizing them, as the benefit social welfare. not clearly explained here …
In positive externalities marginal social benefit is higher than marginal private benefit. You need to say why the MSB is higher not just state it.
Therefore, optimum quantity is higher than quantity market is producing, which means that the good is under produced in the market. So, government should subsidies food products, because than the consumption of products with positive externalities will increase, so there will be more benefit to society.
You now need to combine the market failure with the subsidy diagram to show how the subsidy returns the market to the socially optimum point.
However, it is difficult to set subsidy equal (if we are talking about food products they can be both merit and demerit) to the external benefit and it always…