Ask Anything #33 min read

Anonymous asked,

when the govt executes subsidised vaccination, it puts the price at say $5. Is it a form of price control or direct subsidy on consumption? Same for subsidised rice.

If you are asking about how do we identify the primary objective of the government in providing subsidies, the following might be helpful:

In A level microeconomics, you learn that government intervenes in the market for 3 main reasons.

  1. To improve allocative efficiency. This is to improve the welfare of society by creating a net benefit to society.
  2. To improve equity. The government provides subsidies to ensure people from the lower income brackets are able to afford daily necessities.
  3. To achieve price stability. In macroeconomics, you learn that high inflation is undesirable as it reduces real income and consequently, the standard of living. In microeconomics, achieving price stability has the primary objective of protecting both the consumers and producers.

So, what is the rationale for government to provide subsidies in general? Well, the answer is it depends.

To answer this question, you need to know the context and this is required to score your L3 in essays. Here, vaccination is a merit good. Correcting the market failure due to positive externalities to achieve allocative efficiency, seems to be the main government rationale. However in developing countries, the primary objective could be to improve equity by ensuring that everyone can have access to it. As for vaccination, the price is not as volatile as oil or rice, hence price control is not likely to be the main reason for government intervention.

There are also some additional features to the subsidy that can help you identify the government’s primary objective. The use of means testing and giving subsidy according to one’s income will indicate that the main objective of the government is to address income inequity mainly. The positive externalities or imperfect information can still exists, but it may not be as severe as the income inequity faced in the market. As for price control, you need to keep in mind that there is a upper and lower limit for the price to fluctuate within. If it goes beyond the upper limit, the government will subsidise it, if below the lower limit, the government will tax it.

What about rice then? Try to figure out the answer by yourself, I am sure you will be able to figure out the answer by following the thought process above.

Here is table to sum up what I have just mentioned above:

Government Rationale

Why intervene? Accompanying policy Alternative policies

Allocative efficiency (Merit goods)

Maximise Welfare

Education, joint or complete provision

Equitable Distribution

Ensure everyone will be able to afford the goods and services Means testing, giving people of lower income bracket more subsidies

Progressive taxation

Price Control Protects both consumers and producers Taxes, the government has to protect firms when the prices of goods and services fall below the acceptable range

Price Floor and price Ceiling

If you are asking about how to tell the difference between a price control and consumption subsidy,

A consumption subsidy will leave prices producers’ face higher than the initial market price as demand increases. The market still clears. An example of consumption subsidy would be food coupons.

consumersubsidy

A price control, presumably price ceiling here, will leave prices lower than the market clearing level. There will be a shortage in the market.

priceceiling

Subsidising vaccination seems to be neither of the above. It is a indirect subsidy on producers to correct for positive externalities.

productionsubsidy

Hope this answers your question.

Till next time, dream economics.

Please follow and like us:

Leave a Reply

Your email address will not be published. Required fields are marked *