Answer to Question #211752 in Microeconomics for CeeEhmDhee

Question

The government decides to protect supplies and introduce a unit subsidy for the good or commodity produced by that supplier.

1. Using a diagram, carefully explain the consequences of the action on the equilibrium price and quantity in the market for this goods.

2. Discuss the pro and cons of such policy

Answer 1

Receiving a subsidy by the seller will be tantamount to a decrease in his costs and on the graph will lead to a shift in the supply curve downward by the value G, which will lead to an increase in the equilibrium quantity of goods from Q₁ to Q₂ and, at the same time, to a decrease in the equilibrium price from P₁ to P₂.

Equilibrium prices established in the market at a certain moment, due to various circumstances, do not always suit society.

In this case, the government can set fixed prices, which can be either lower or higher than equilibrium market prices.

The reasons for such interference are usually social problems - income inequality, low living standards of the population, limited access to consumer goods, etc. Therefore, most often government intervention in market pricing is reduced to forced price-fixing at a level below the market equilibrium of supply and demand.

The consequences of price controls, especially when applied for a long time, have a negative effect both in the social and economic spheres.