Protectionist Subsidies and Evaluating Protectionism
Summary
TLDRThis lesson explores the concept of protectionist subsidies, a tool used by governments to support domestic industries by reducing imports and boosting local production. Using South Korea's apple market as an example, the video explains how subsidies lower production costs, increase supply, and affect various stakeholders. While subsidies benefit domestic producers, they also impose a cost on taxpayers and can result in a loss of total welfare. The lesson concludes by discussing situations where protectionism may be justified, such as for strategic or emerging industries.
Takeaways
- 📉 Governments may use protectionist subsidies to support domestic producers and reduce imports.
- 🍎 The example of the South Korean apple market illustrates how a protectionist subsidy affects supply and demand.
- 💸 A subsidy reduces the marginal cost of production, shifting the supply curve outward, increasing domestic supply.
- 🛑 Unlike tariffs or quotas, subsidies don’t affect the price for consumers, only the quantity supplied by domestic producers.
- 📦 The subsidy allows domestic producers to sell more at the same price, reducing the need for imports.
- 📊 Producer surplus increases due to higher revenues from the subsidy, while consumer surplus remains unchanged.
- 🛑 Foreign producers are harmed by the subsidy since they sell fewer products at the same price, reducing their revenue.
- 💵 The cost of the subsidy to taxpayers represents a loss of total welfare, outweighing the benefits to domestic producers.
- ⚖️ Subsidies can create inefficiencies, as the opportunity cost impacts public spending on other sectors like healthcare and education.
- 🌍 While protectionism generally leads to welfare loss, there are cases where it may be justified, such as for strategic or emerging industries.
Q & A
What is a protectionist subsidy?
-A protectionist subsidy is a payment from the government to domestic producers for each unit of the good produced. The goal is to reduce imports, increase domestic sales, and raise revenues for domestic firms at the expense of foreign producers.
How does a subsidy affect the supply curve for a good like apples in South Korea?
-A subsidy lowers the marginal cost of production for domestic producers, causing the supply curve to shift outward (to the right). This increases the domestic supply of apples without affecting the price.
Does the price of apples change in South Korea after the implementation of a protectionist subsidy?
-No, the price of apples in South Korea does not change with a protectionist subsidy. The world price remains lower than the domestic price, so consumers continue to pay the same price.
What happens to the quantity of apples demanded after the subsidy is implemented?
-The quantity of apples demanded remains unchanged because the price remains the same. However, the quantity of apples supplied by domestic producers increases.
How does the subsidy impact the quantity of apple imports in South Korea?
-The quantity of apple imports decreases because the domestic supply has increased, reducing the need for imports.
What happens to consumer surplus in the South Korean apple market after the subsidy?
-Consumer surplus remains unchanged since there is no change in the price that consumers pay for apples.
How does the subsidy affect domestic producers' revenue?
-Domestic producers' revenue increases because they receive the world price plus the subsidy, leading to a higher producer surplus. The subsidy boosts their income despite the price remaining the same for consumers.
What is the impact of the subsidy on foreign producers?
-Foreign producers are worse off because the quantity of imports decreases, reducing their revenues. The total revenue for foreign producers is lower after the subsidy.
What is the cost of the subsidy to Korean taxpayers?
-The cost of the subsidy to Korean taxpayers is represented by the vertical distance between the two supply curves and the total quantity of apples produced domestically. This cost is borne by taxpayers, potentially reducing funds for other public services or raising taxes.
Is there a net loss in total welfare due to the subsidy?
-Yes, there is a net loss in total welfare. While producer surplus increases, the cost of the subsidy exceeds the benefit to producers. This loss is represented by a deadweight loss, or a loss of total welfare for society.
Outlines
📈 Introduction to Protectionist Subsidies
This paragraph introduces the concept of protectionist subsidies, a government tool used to protect domestic producers from foreign competition. The example of the South Korean apple market is revisited from previous lessons, where the world price of apples (PW) is lower than the domestic price. The Korean government aims to help domestic apple farmers by introducing a subsidy. A protectionist subsidy is defined as a payment from the government to producers, which aims to reduce imports and boost domestic producers' sales and revenue. The paragraph explains how a subsidy lowers the marginal cost of production, shifts the supply curve, and increases domestic supply, although it does not affect the price or quantity demanded of apples.
🛍️ Impact on Consumer and Producer Surplus
This paragraph examines the effects of the subsidy on consumer and producer surplus in the South Korean apple market. It explains that consumer surplus remains unchanged, represented by a triangle below the domestic demand curve and above the world price (PW). However, producer surplus increases due to the higher price producers receive with the subsidy, represented as the price (PW) plus the subsidy amount. This increase in producer surplus expands the benefits to domestic producers without harming consumers, leading to an apparent gain in domestic welfare.
🌍 Effects on Foreign Producers and Welfare Analysis
Here, the focus shifts to the impact of the subsidy on foreign producers and total welfare. The reduction in imports decreases foreign producer revenue, represented by a shrinking rectangle in the supply-demand graph. The paragraph then introduces the cost of the subsidy to Korean taxpayers, represented by a black rectangle on the graph. The net effect on total welfare is negative, as the cost of the subsidy exceeds the benefit to producers. This loss of welfare is a key issue in protectionist policies, highlighting the inefficiency and opportunity costs for the broader society.
🔍 Cost-Benefit Analysis of Protectionist Subsidies
This paragraph provides a cost-benefit analysis of the subsidy. While consumers are not affected and producers benefit, the overall welfare in South Korea decreases because the cost to taxpayers exceeds the benefit to producers. The black triangle in the graph represents the deadweight loss, or the loss of total welfare, due to the subsidy. The paragraph concludes that protectionist subsidies, like other protectionist tools, lead to inefficiency and a net loss to society, despite benefiting specific domestic industries.
🛡️ Justifying Protectionism in Strategic Industries
In this concluding paragraph, the script discusses cases where protectionism may be justified, such as for strategic industries (e.g., military or defense) or for 'sunset' or 'sunrise' industries. These may include new, developing industries or industries in decline that governments may want to support temporarily. The paragraph reviews the lesson on protectionist subsidies and broader protectionism strategies, noting that while these tools may sometimes be beneficial, they often result in a loss of total welfare and should be carefully evaluated.
Mindmap
Keywords
💡Protectionism
💡Subsidy
💡Marginal Cost
💡Consumer Surplus
💡Producer Surplus
💡Deadweight Loss
💡Comparative Advantage
💡Imports
💡Opportunity Cost
💡Strategic Industries
Highlights
Introduction to the final protectionist tool: protectionist subsidies.
Review of protectionist tariffs and quotas in previous lessons.
Definition of protectionist subsidies as government payments to domestic producers to reduce imports and increase revenues.
Illustration of how a subsidy lowers the marginal cost of production, shifting the supply curve to the right.
No change in the price of apples for consumers after the subsidy, as the world price (PW) remains the same.
Subsidy increases domestic supply of apples in South Korea, reducing the need for imports.
Analysis of consumer and producer surplus: no change in consumer surplus but an increase in producer surplus.
South Korean producers benefit from higher revenues, while foreign producers see a decrease in revenues due to reduced imports.
Cost of the subsidy to South Korean taxpayers, resulting in an opportunity cost.
The increase in producer surplus is outweighed by the cost of the subsidy, leading to a loss of total welfare.
Protectionism, like subsidies, often results in a deadweight loss to society.
Strategic industries, such as military or defense, may justify protectionism despite welfare losses.
Protectionism can also be used to support infant or sunset industries in the national interest.
In conclusion, protectionist subsidies typically reduce welfare, but there may be exceptions based on strategic or economic development goals.
End of the protectionism series, covering tariffs, quotas, and subsidies, with a focus on analyzing their impacts on stakeholders.
Transcripts
here we
[Music]
go in this lesson we're going to discuss
the final tool of protectionism that a
government may choose to employ in order
to protect domestic producers from
cheaper foreign competition if you've
been following the lessons on
protectionism then you've already seen
the video on protectionist tariffs and
the video on protectionist quotas in
this lesson we're going to look at
protectionist subsidies we're going to
use the same example as we have in our
previous two videos on protectionism
we're going to look at the market for
apples in South Korea which we have here
on the right assume as we have in
previous lessons that the world price of
apples PW is lower than the domestic
equilibrium price of apples in South
Korea which would be found at the
intersection of SK and DK the world
Supply is perfectly elastic because
Apple consumers in Korea can buy as many
apples as they want at the world price
without causing the world price of
apples to rise due to the fact that
Korea has a comparative disadvantage in
apple production Korea will import a
quantity of apples from qsk to qdk under
free trade assume now that the Korean
government wishes to protect Korean
Apple Farmers with the use of a subsidy
let's go over to our definition here and
Define what a protectionist subsidy is
before we look at the graphical
implications of one a subsidy you may
have learned the definition of in your
microeconomics unit it's simply a
payment from the government to producers
for each unit of the good produced
that's a per unit subsidy a
protectionist subsidy is one that is
intended to reduce the quantity of
imports and allow domestic producers to
sell more of their product and earn
higher revenues in other words the
intent of a protectionist subsidy is
essentially the same as any other form
of protectionism to increase the sales
and the revenues of domestic firms at
the expense of foreign producers looking
at our graph on the right we can
illustrate the effects of a
protectionist subsidy in the market for
apples in South Korea you might have
learned in microeconomics that a subsidy
is a determinant of supply for a good
and a subsidy lowers the marginal cost
of producing a good for the firms that
receive it in microeconomics we learned
that the supply curve represents the
marginal cost the cost of each
additional Apple in South Korea in this
case a subsidy reduces the marginal cost
to Apple Growers in South Korea and
therefore shifts the marginal cost curve
down or you could say shifts the supply
curve to the right the impact of a
subsidy for Apple growers in South Korea
would be as follows I label this curve s
k with the subsidy the amount of the
subsidy per Apple can be understood as
the vertical distance between the two
Supply
curves since the vertical axis on a
graph is price represented by dollar or
South Korean W in this case the perun
subsidy lowers the cost of apples in
South Korea by the vertical distance
between the two curves shifts the supply
curve outward and leads to an increase
in the domestic supply of apples in
South Korea but how does this impact the
price in the quantity demanded of apples
in South Korea unlike the other forms of
protectionism quotas and tariffs there's
actually not going to be a change in the
price of apples in South Korea when
there's a subsidy for domestic growers
in fact the world price of PW is still
lower than the domestic price of apples
would be with the subsidy which would be
found at the intersection of SK with
subsidy and DK so what happens instead
is that due to the lower marginal cost
of production Korean Apple Growers are
now going to be willing and able to
provide a greater quantity of apples to
the market at the world price of PW so
what we end up with is a new domestic
quantity supplied I'll call this
qsk that's the South Korean quantity of
apples produced one how does this impact
the quantity demanded since the price of
apples has not changed there has been no
change in the quantity demanded so qdk
will remain the quantity of apples that
Korean consumers wish to buy so what
happens then there's been no change in
price no change in quantity demanded but
the quantity supplied by Korean Farmers
has increased there is now a need for
fewer Apple Imports in South Korea so
our original quantity of imports no
longer
applies and what we see instead is that
the quantity of imports is now smaller
so
Imports with the
subsidy are less than they were before
the subsidy next we can evaluate the
effect of the subsidy on different
stakeholders in South Korea and abroad
we have quite a bit of analysis to do
here because it's not clear from the
graph whether consumers and producers
are harmed or helped by the subsidy so
in order to analyze that we need to look
at the areas of consumer and producer
Surplus in the market for apples before
and after the subsidy you'll recall from
a previous lesson showing the gains from
international trade in a supply and
demand diagram that consumer surplus in
a free trade diagram is represented by
the triangle below the domestic demand
curve and above the world price of PW in
this case consumer surplus in the Apple
Market does not change following the
subsidy so the yellow triangle
represents the consumer surplus both
before and after the subsidy for Apple
Growers
producer Surplus in a free trade diagram
is represented by the area below the
price and above the supply curve but
here's where things get a little
complicated in our subsidy diagram since
a subsidy is a payment from the
government to producers per unit
produced we need to show the price that
Apple producers in South Korea will
actually receive for their apples after
they have received the subsidy from the
government so here's how we can look at
this the price that consumers pay is
PW but the price Apple producers will
actually receive is something greater
than PW the amount they receive is PW
plus the subsidy and the subsidy is the
vertical distance between the two Supply
curves so to find the price that
producers actually receive for their
apples we can go up to the original
supply curve which illustrates the
distance between the two Supply curves
and I can call this
PS for the price the producers receive
with the subsidy so PS represents the
price
with the subsidy and it's higher than PW
the price consumers pay in other words
what has happened is that while consumer
surpluses remain the same producer
surpluses increased from a small
triangle before the subsidy would have
been below PW and above domestic Supply
to now a larger triangle all the way up
to
PS and out to
qk1 so the producer Surplus has notably
increased in the market for apples in
South Korea there has been an increase
in total welfare between consumers and
producers so so far it looks as if there
is no loss of welfare in the market for
apples because there is no change in
consumer
surplus since price consumers pay
Remains the Same and quantity demanded
Remains the
Same what about domestic producers there
has actually been an
increase in domestic producer Surplus
since the price domestic producers
receive including the subsidy is higher
than PW and the
quantity produced has increased clearly
producers are better off with the
subsidy and consumers are no worse off
so there's been no negative effect on
the Apple Market itself at least
domestically let's have a look at
foreign
producers in purple I'm going to outline
the area of foreign producer Revenue
before the
subsidy everything below PW and in
between qask and qdk represents foreign
producer revenues it's the rectangle
representing the amount of money earned
by Foreign producers from selling their
apples to South Korea foreign producers
are going to be worse off following the
subsidy there's no doubt about that so
the area of foreign producer revenue is
now a smaller quantity of imports times
the same price so the purple rectangle
has shrunk foreign producers are worse
off they'll earn less
Revenue because Imports are fewer and
the price has remained the same so total
revenue is found by multiplying the
price times the quantity and since the
quantity has decreased for producers
experience less Revenue following this
subsidy than they did
before now here's where we can find the
inefficiency from a subsidy for Korean
Apple producers we need to look at the
cost cost of the subsidy for Korean
taxpayers and the government and then
compare that to the increase in the
benefit to Korean stakeholders so to
conclude here I'm going to outline in
Black the cost of the subsidy the
subsidy costs the government the
vertical distance between the two Supply
curves that's this vertical distance and
the quantity of apples being
subsidized is from Zer to qsk K1 the
total quantity supplied in South Korea
so the rectangle that I'm outlining in
Black represents the cost to Korean
taxpayers of this subsidy so Korean
taxpayers in the government are worse
off because tax revenue is allocated
towards Apple subsidies now what's the
opportunity cost of subsidizing Apple
producers this might mean less money
available for other government programs
or it may mean higher taxes paid by
Korean
households so there's always an opport
opportunity cost and to determine
whether or not the subsidy increases or
decreases total welfare in South Korea
we have to compare the cost of the
subsidy to the benefit of the subsidy so
let's go back and review what the
benefit was consumers were no better off
following the subsidy so there's no
actual benefit to Apple consumers in
South Korea producers were made better
off so there was an increase in producer
Surplus represented by the increase in
the size of the green triangle
representing producer Surplus the red
outlined area on my graph represents the
increase in producer Surplus or the net
benefit of the subsidy the black
outlined rectangle represents the net
cost of the subsidy so what is the net
effect on total welfare to answer this
we must compare the sizes of the red
area and the black area clearly the
black rectangle is larger than the red
area the amount by which the black
rectangle is larger than the red area is
this triangle right here in the right
hand side of the area representing the
cost of the subsidy to Korean taxpayers
the black shaded area on my graph
represents what do you think well what
does black represent in other graphs
that I've used in this unit it
represents the loss of total welfare we
can say that there is a loss of total
welfare represented by the amount by
which the cost of the subsidy exceeds
the subsidy's benefit which was the
increase in producer
Surplus just like with other forms of
protectionism there is a loss of total
welfare incurred on society because of
the government's attempt to protect
certain stakeholders within the economy
in this case the Korean government
decided to protect Korean Apple Growers
by giving them taxpayer money in order
to increase the domestic Supply and
reduce the quantity of Apple Imports on
the surface it appears that nobody is
harmed by this decision consumers are
not made worse off and producers are
made better off with that analysis alone
you might say that the subsidy increases
welfare in South Korea however that
fails to account for the cost of the
subsidy to taxpayers and the rest of
society anytime government spends
taxpayers money on something like a
subsidy for particular producers within
the economy there is an opportunity cost
less money available for Education less
money available for health care or
infrastructure or other important goods
that South Korea could benefit from or
maybe taxes had to be raised on
households in order to pay for this
subsidy either way the net effect on
total welfare is negative by the black
triangle in our graph the cost exceeds
the benefit this is a simple example of
cost benefit analysis which is something
at the core of most of
Economics so that concludes our lessons
on protectionism we learned about
protectionist tariffs protectionist
quotas and protectionist subsidies and
when we take into account the net effect
on total welfare of all of these forms
of protectionism we saw that there was a
dead weight loss does this mean that
protectionism should never be used not
necessarily something you will probably
evaluate in your class when discussing
protectionism is the circumstances under
which it might be justified there are
certainly some cases where protecting
domestic Industries might be in the best
interest of society for example
strategic Industries such as military or
defense a country might not want to
import its military technology therefore
protecting those Industries is very
important other examples might be sunset
or Sunrise Industries countries might
choose to protect infant industries that
are new and can't compete with larger
foreign producers but are deemed to be
important for the economy protecting
infant or Sunrise Industries in
developing countries might be a strategy
for economic development once they've
achieved economies of scale
protectionism can be reduced and the
firms can be large enough to compete
with foreign producers Sunset Industries
are kind of on the other hand more
industrialized countries might have
industries that are on their way out and
the government knows this protectionism
might be used just to soften the decline
of an industry such as televisions in
the United States for example today no
televisions are produced in the US but
for a couple decades that industry was
in Decline and it might have been in the
interest of the government to protect
the workers in that industry before it
eventually collapsed to review in this
lesson we've defined protectionist
subsidies we've analyzed their effects
on various stakeholders concluding that
in most circumstances a protectionist
subsidy will lead to a dead weight loss
or a loss of total welfare we've then
evaluated protectionism as a whole by
looking at circumstances under which
protectionism might be justified
including the Strategic argument and
sunset and sunrise
Industries here we
go one step at a time
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