▷ Producer subsidies; What is it, Example and Exercise

Producer subsidies are economic policies established by the state to protect and encourage the development of vulnerable product sectors, through economic aid to private companies in the country on a temporary basis, be they in the industrial, commercial or agricultural sector.

These are state interventionist measures that seeks to correct the imperfections present in the market and this way compensate for social inequalities.

Basically, with these subsidies guarantees that producers can offer the necessary quantities to cover market demand, without representing a loss for them, or an increase in price for the final consumer.

However, increasing production levels without increasing the supply price is not feasible for producers, therefore, the state It grants them subsidies that allow them to offer at prices lower than their marginal costs, the difference being compensated with bonuses. subsidy.

In this way, benefits are not only generated for the producer, but also for the consumer; However, from a microeconomic point of view,

these subsidies to the producer generate a loss of efficiency and social welfare.

What are producer subsidies?

Producer subsidies are economic aid that the state grants to certain sectors products of the country, when imperfections are generated in the market that disadvantage producers; since the current market price does not cover its marginal costs.

To that end, producer subsidies allow companies to produce or sell at a price lower than the price demanded without representing a loss for them, being the difference of the ask price (Pd) minus the offer price (Ps) the amount of the subsidy.

Why does the state grant subsidies to the producer?

The state establishes these subsidies for several reasons, mainly for these two, which are:

The first is to protect the national productive sectors, since protecting these sectors is essential to maintain stable economic development in the country and generate sources of employment.

The second reason is to indirectly protect consumers, guaranteeing the supply of products and services that satisfy the consumption needs of the population, covering the market demand at a price acceptable to the population.

Types of producer subsidies

The state can grant different types of subsidies to producers, such as:

Production subsidies:

They are subsidies that the state grants to companies. according to the quantities produced or sold in the market, increased the quantities offered; for example, subsidies to agricultural producers for hectares produced.

Export subsidies:

These subsidies are incentives that the state grants to producers to export your products or services, being this measure implemented by the governments to create a positive balance in the balance of payments.

Import subsidies:

They are subsidies implemented with the purpose of reduce the negative impact generated by the high prices of imported products and that raise production costs, affecting both producers and final consumers; as are imports of inputs and essential raw materials.

Effects of producer subsidies on welfare levels

When the state grants subsidies, regardless of whether they fall on producers or consumers, they generate unforeseen incidents. only in the price and in the quantities offered in the market, these have deeper effects on the levels of well-being Social.

For producers, these subsidies allow them to produce more and generate Additional benefits for a value higher than its marginal costs, a situation that would hardly occur under current market conditions without the application of the subsidy; generating, for this purpose, a producer surplus and, therefore, a increase in well-being for them.

At the same time, the producer subsidy also generates additional benefits for the consumer by being able to acquire a good or service below its market value, also creating for them a surplus that improves their levels of well-being.

Nevertheless, from microeconomic analysis, taking into account all market agents as a whole, subsidies to producers are market distorting factors that generate loss of social welfare.

This is because these economic policies prevent state resources from being allocated efficiently among the entire population, since for the state to finance these subsidies implies assuming a higher cost than the benefits that are additionally generated for producers and consumers.

Effects of producer subsidies on the economy

Although the subsidies granted to producers generate welfare losses, does not mean that the effects on the economy are negative, these can generate positive externalities in the market, generating benefits over other economic agents, such as the creation of new sources of employment.

The positive externalities, therefore, representall those effects that indirectly have a positive impact on the socioeconomic environment of the particular country or market in which it is applied.

Producer subsidies in market equilibrium

When a producer subsidy is established, a new equilibrium in the market, which represents the intercept between the supply curve and the demand curve.

The supply curve is determined by the price that the consumer is willing to pay (Pd) for each unit that he wishes to consume; and the supply curve is determined by the price that the producer is willing to receive (Ps) for each unit produced.

In this sense, balance is point where the price received by the supplier is equal to the price paid by the demander plus the subsidy; that is, it is created when exactly the same quantities are produced as are going to be consumed.

Graphic representation of producer subsidies

Graphically, the producer subsidy causes a shift in the supply curve to the right, since the quantities offered (Q´) are increased by a higher price received (Ps) than the price paid by the demanders (Pd).

Practical exercise of producer subsidies