ECO 1101 PRINCIPLE OF MICROECONOMICS Table Of Content: Content| Page| Table of Content| 2| Introduction| 3| Question 1| 4 ??? 5| Question 2| 6| Conclusion| 7| Appendix| 8| Reference| 9| Introduction: Subsidy is an incentive from the government to encourage producers to produce more. Beadshaw,J said “the benefit of the subsidy will be split into the producer and consumer” (2001, p. 91). On the other hand, subsidy meant support, help and protection from government. A sum of money allowed by the government or a public body to support an industry or business so that the price of a product or service may remain low or cheap.
There are few disadvantages for government to be provide the subsidy. Question: 1. Using a diagram, illustrate the effect of the removal of subsidy by the government? According to Wikipedia “Subsidy is a form of financial assistance paid to a business or economic sector. Most of it made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor.
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Examples are subsidies to encourage the sale of exports; subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production” (Wikipedia, 2011). Indirectly, it didn’t affect the demand line but it will affect the move or shift of the supply line. It is because normally the subsidy will go to suppliers. Beadshaw,J said “the benefit of the subsidy will be split into the producer and consumer” (2001, p. 91). It did not go through to consumers.
For an example, Malaysia’s Government subsides the fuel; but it did not pass the subsidy to citizens. Malaysia’s Government just paid to the suppler. So, it indicates that the supply line will shift or move and the demand line did not move. What is the effect of removal of subsidy by the government? Due to removal of subsidy by the government, the price of the product will increase (From P0 to P1) and the quantity will reduces (From Q0 to Q1). This is because the shift of the supply line (From right to left). Therefore, market equilibrium will change (From point A to point B).
In other words, it means it is supply shortages. Effect of Changes in Subsidy Price Price B B P0 P0 P1 P1 A A Quantity Quantity Q1 Q1 Q0 Q0 Demand line = Supply line = New Supply line = 2. What are the reasons for such a move to be taken by the government? There are few disadvantages for government to be provide the subsidy. First disadvantage is government will have to pay for the subsidy. The price of petrol (RON 95) is RM1. 90 per little. This is because government subsidies. Based on the star online 2011, Malaysia Government has risen from RM8bil to RM18bil a year.
For here, we can see that government is paying the subsidy. Due to this it will require higher tax. For an example Malaysia increased the government tax from 5% to 6%. Second disadvantage is difficult to estimate positive externality. Third, giving subsidies to firm may encourage inefficiency, because the firms can rely on government aid. John and Mello said “Private contractors more efficient than government TSA screeners, claims committee report”. From here we can see that, the workers of government are rely on the aid of it.
It would not bring benefit to the workers. Lastly, Government may failure. The government may have poor information about the services. Although subsidy bring a lot of disadvantages but it increases social efficiency. It is because pay less in the product. For an example, citizens pay Rm1. 90 per little for RON95. If without subsidy of government, citizen of Malaysia will require to pay more. Conclusion: As a conclusion, the subsidy will change the price and the quantity of the product. It is because the changes of the supply line.
The supply line will shift to the left or right or move upward or downward. For here, we can see the price in market will depend on the equilibrium of the market. Appendix: (Hard copy) References: Wikipedia. 2011. Viewed on 1st July 2011. Available from: . Beadshaw, John. 2001. Economics: a student’s guide. 5th edn. Pearson Education. Prentice Hall. Star Online. 2011. Viewed on 1st July 1, 2011. Available from: . NBC Group of Companies. 2011. Viewed on 1st July 2011. Available from: . John P. Mello, Jr. Government Security News. 2011. Viewed on 1st July 2011. Available from: .