Subsidies reduce prices and lower inflation? (1 Viewer)

[kooltrainer]

wel, it says in leading edge textbook that subsides reduce prices and lower inflation ...

But i thought subsidies are payments made by government to domestic markets.. so its expenditure.. so it'll have eco growth.. and thus higher inflation

 

[kooltrainer]

the effect of the reduced market price is greater than the small increase in expenditure

omg, economics have always been a double edged sword.. how do u no this occurs instead of that?
i mean , why wouldn't reduced market price be smaller than the small increase in expenditure

 

[eskimoh]

lol yeh basically subsidies encourage and stimulate domestic production + then there will be more competition between industries in the market and thus the prices will be reduced (and of course as prices are reduced, there is lower inflation or rather no increase in inflation)
but also the subsidies reduce costs for domestic producers so there is no threat of costpush inflation from firms AND the prices they are sold for to the market are lower

 

[runnable]

omg, economics have always been a double edged sword.. how do u no this occurs instead of that?
i mean , why wouldn't reduced market price be smaller than the small increase in expenditure

Thats the same for increase in interest rates. Rise in interest rates will increase cost-push inflation, but that effect is much smaller than the decrease in spending and investment, so the OVERALL effect is reduced inflation.

 

[gnrlies]

I think some points have been lost or misrepresented...

A subsidy itself will not lower the price. It merely allows domestic producers to compete with foreign producers at the market equilibrium price. The world price is not influenced by a subsidy in Australia. So to say a subsidy will reduce prices is false.

For example, without a subsidy the world price for wheat is $10 a tonne. At this price Australian producers are willing to supply 50% of our needs, and we will import the rest. With a subsidy, the world price would still be $10 but now more Australian producers would be willing to enter the market and they would supply say 90% of the market.

So all that a subsidy does, is allow more domestic producers to enter the market, or thought of a different way, it will allow domestic industries to remain open when foreign competition increases (which may drive the price down). For example Australia gives generous car subsidies because if they didn't australian industries would close as they would not be able to compete with the cheaper imports. But you notice that cars are not cheaper in Australia as a result.

I think where the confusion is coming from is that tariffs ARE inflationary because they increase the price. So a subsidy is a form of protection that is not inflationary.

 

[kooltrainer]

I think some points have been lost or misrepresented...

A subsidy itself will not lower the price. It merely allows domestic producers to compete with foreign producers at the market equilibrium price. The world price is not influenced by a subsidy in Australia. So to say a subsidy will reduce prices is false.

yeh, buh i think they're talkin abt domestic prices, not world price..
btw.. do u no why we have heavy tariffs on our motor industry and textile industry?? ......
Also, whats the commodity price boom?
and whats the resourses boom??

all these terms not related to syllabus is driving me mad.. but apparently i need em for essays..........................................................................................

 

[munchiecrunchie]

we have heavy tariffs on our motor industry coz their inefficient compared to international producers and probably cannot compete without the protection.

the commodity/resources boom refers to the growth in this particular sector in recent years due to global demand and the fact we have a vast amount of natural resources. Its basically the main composition of our exports and driving up eco growth.

 

[gnrlies]

yeh, buh i think they're talkin abt domestic prices, not world price..
btw.. do u no why we have heavy tariffs on our motor industry and textile industry?? ......
Also, whats the commodity price boom?
and whats the resourses boom??

all these terms not related to syllabus is driving me mad.. but apparently i need em for essays..........................................................................................

In most cases (with allowance for some variation) the world price and the domestic price is the same (otherwise there must be some non price competition involved which would make the need for a subsidy redundant). i.e. we cannot charge a different price to the world price otherwise everyone would import from the cheaper sources.

And we have higher tariffs on these things because no government has the political will to lower them like we have all of our other tariffs.