Explain the economic effects of price supports. Explicitly include environmental and global impa

step 1 So we will understand the concept of subsidy. So it is the amount that government provides to ag

Explain the economic effects of price supports. Explicitly...

Key Concepts

Environmental Impact

The environmental impact of price supports arises from the tendency to produce more than is economically or ecologically sustainable. Overproduction can lead to intensive agricultural practices, increased use of chemicals and fertilizers, and greater strain on natural resources, all of which contribute to environmental degradation such as soil erosion and water contamination.

Price Supports

Price supports are government interventions usually implemented to maintain the market price of a commodity above its equilibrium level. This policy is often imposed to stabilize farmers' incomes and protect domestic producers from market fluctuations, but it can lead to excess production that the market does not naturally demand.

Market Distortion

Market distortion refers to the disruption of the natural balance of supply and demand caused by external interventions such as price supports. When prices are kept artificially high, consumers may buy less while producers expand output, creating surpluses and deviating from efficient market behavior.

Resource Misallocation

Resource misallocation occurs when economic resources are diverted from their most efficient uses due to distorted price signals. Economists argue that price supports cause misallocation by encouraging overinvestment in sectors that receive government backing, thus limiting resources available for potentially more competitive or innovative industries.

Global Impact

Global impact pertains to how domestic price supports can distort international markets. Surpluses generated by price supports may be exported, affecting global commodity prices and trade balances. This distortion can lead to trade disputes and impact the competitive dynamics among nations, influencing economic stability on a global scale.

Transcript

00:01 So we will understand the concept of subsidy.

00:07 So it is the amount that government provides to agriculture is in form of assistance for reducing their costs.

01:07 Let's suppose there is a hundred dollar cost to a farmer but what the government does, the government reduces.

01:16 Is the cost by providing a subsidy of $60.

01:19 So the net cost will be only $40 to the farmer.

01:25 So that is the concept of subsidy.

01:28 However, what happens? what happens? this subsidy, it is financed out of tax revenues collected by government, okay, in form of indirect taxes.

02:21 So, what is the nature of indirect taxes that it is collected by government but it increases the cost of the product.

02:30 So all in all, it increases the cost which is actually paid by the consumers.

02:36 So for consumers, subsidy is not a corrective action for a balanced strategy for any economy.

02:45 However, the government can establish the balanced economy policy.

02:50 So that the subsidy can be allocated in a balanced form.

02:58 However, also what happens along with the subsidy that it is beneficial for environment.

03:14 Why? because in case, let's suppose there is a $100 cost to the farmer.

03:24 But now the government has provided $60 per unit subsidy to the farmer.

03:28 Now, in addition to that, the farmer has to reduce its labour also...

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