▷ Consumer subsidies; What is it, example and Exercise

Consumer subsidies represent grants or economic benefits that the state grants for certain periods of time to the vulnerable population, giving them the possibility of accessing essential products or services, which would otherwise be difficult for them to access.

These consumer subsidies, Like any interventionist policy, they distort the equilibrium of the market, even though, in this case, consumption increases, encourages productionand thereby improve the quality of life of the poorest people.

However, it is a measure that must be previously analyzed; since, although these subsidies generate a social benefit for consumers and producers; These are not the only economic agents in the market, therefore, From the microeconomic point of view, these measures generate a loss of efficiency.and with it loss of social welfare.

Why does the state apply consumer subsidies?

A grant is a financial support from the stateto stimulate and finance the demand for essential goods and services and in this case protect consumers, mainly aimed at the population with the lowest resources.

This occurs because the economic situation of the market prevents the offer price from being accessible. for the population with less income, being the market price, the minimum acceptable price for the bidder.

In short, without the subsidy, neither the producer can lower the offer price further, nor the consumer. can further raise the demand price, leaving the population in a situation of poverty out of the market.

As a measure, the state grants subsidies to the segments of the population it wants to protect, so that the producer can lower the offer price, without implying a loss for him, since the state covers the difference through subsidy bonds.

In this way, the state can artificially balance market imperfections, encourage trade and cover basic social needs.

Types of consumer subsidies

Consumer subsidies can be established in two ways:

Direct subsidies:

They are subsidies that directly benefit certain people or consumers, such as subsidies for the elderly or those with a physical or mental disability.

 Indirect subsidies:

They are non-monetary benefits that fall on certain goods or services, in such a way that the bidder can offer a price lower than the equilibrium price in the market, with the state paying the difference based on its production or sales levels.

Therefore, the consumer subsidy is indirect, such as subsidies for electricity consumption rates.

Effect of Consumer Subsidies on Market Equilibrium

When the state grants subsidies to the consumer, whether direct or indirect, a new equilibrium is generated in the market, shifting the demand curve to the right.

This, of course, generates an increase in the traced quantities of goods and services demanded (Qd), as well as in the quantities supplied (Qs), since suppliers are motivated to increase their production as demanders increase consumption levels.

However, the price paid by the demanders (Pd) is lower than the equilibrium price, but the price charged by the suppliers (Ps) is higher than the equilibrium price.

This difference between the price charged by the bidder and what the applicant pays corresponds to the economic subsidy.

Consumer subsidies and their effect on welfare

Subsidies or economic subsidies generate an effect not only in the equilibrium of the market, but also generates an impact on the welfare state, both for consumers and for producers.

For claimants benefiting from The subsidy represents an increase in the consumer surplus, since, they are additional benefits that are generated for the applicants by being able to pay for a good or service at a price lower than the market price.

For producers, by being able to increase the quantities sold for a price higher than their marginal cost, also generates them producer surplus, also generating additional benefits for them.

The sum of these two surpluses that are created with the consumer subsidy represents social welfare, therefore, welfare is increased for both.

However, these subsidies only benefit certain segments of the population and the economic resources that are allocated to finance that consumption, They limit resources from being allocated efficiently among the entire population.

Therefore, from a microeconomic point of view, consumer subsidies generate social loss, since decreeing a subsidy represents a higher social cost than the benefits that can be generated for the benefited consumers and producers.

Fiscal spending and consumer subsidies

When a subsidy is established, it must be taken into account that this not only affects the consumer and the producer, also about the state, since on this falls the monetary expense to finance the subsidy and also falls indirectly on taxpayers.

In this sense, if the state grants a subsidy (S) for each unit traded between the producer and the consumer, his tax expenditure is equal to the amount of the subsidy (S) times the new amount (Q´) that is generated in the market, being the equation: GF = S x Q´.

Benefits of Consumer Subsidies to the Economy

Despite these economic subsidies, they generate a loss of efficiency in the optimal allocation of resources and with it a loss of well-being, not necessarily all effects are negative, On the contrary, it can help create positive externalities. in the market, generating surplus instead of losses.

In addition, it allows the creation of a more inclusive market, with more social equity, to guarantee that the entire population can cover certain basic needs, through subsidies to basic food or basic services such as water, gas, gasoline, electricity, or others.

Graphic representation of consumer subsidies

As can be seen in the following graph, the consumer subsidy causes a shift to the left in the demand curve.

Practical exercise of consumer subsidies