Protectionist Subsidies and Evaluating Protectionism

Summary

This 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

00:00

📈 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.

05:02

🛍️ 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.

10:03

🌍 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.

Keywords

💡Protectionism

Protectionism refers to government policies aimed at shielding domestic industries from foreign competition. In the video, protectionism is the central theme, and various tools like tariffs, quotas, and subsidies are explored to demonstrate how governments protect local producers. The lesson specifically uses the example of the apple market in South Korea to illustrate these protectionist measures.

💡Subsidy

A subsidy is a payment from the government to producers for each unit of a good produced, aimed at lowering production costs. In the video, a protectionist subsidy is highlighted as a tool used by the Korean government to support domestic apple growers, allowing them to supply more apples at a lower marginal cost while competing against cheaper foreign imports.

💡Marginal Cost

Marginal cost refers to the cost of producing one additional unit of a good. In the context of the video, the marginal cost curve shifts downward when the government provides subsidies, allowing South Korean apple producers to produce more apples at a reduced cost, thereby increasing their supply and reducing reliance on imports.

💡Consumer Surplus

Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. The video explains that consumer surplus in the South Korean apple market remains unchanged after the subsidy since the price of apples for consumers does not change, despite the government’s intervention to protect domestic producers.

💡Producer Surplus

Producer surplus is the difference between the price at which producers are willing to sell a good and the actual price they receive. The video demonstrates that the subsidy increases producer surplus for Korean apple growers, as they receive the world price (PW) plus the subsidy amount, thereby benefiting from higher revenues and greater supply.

💡Deadweight Loss

Deadweight loss refers to the loss of total economic welfare that results when market inefficiencies occur, such as those caused by protectionist policies. The video concludes that despite benefiting producers, the subsidy leads to a deadweight loss in South Korea due to the higher cost imposed on taxpayers, reducing overall economic efficiency.

💡Comparative Advantage

Comparative advantage is the economic principle where a country produces goods at a lower opportunity cost than others. In the video, South Korea's comparative disadvantage in apple production is a reason why it imports apples at the world price, and the government’s use of subsidies attempts to counteract this by supporting domestic producers.

💡Imports

Imports are goods brought into a country from abroad for sale. In the context of the South Korean apple market, the video shows that subsidies reduce the need for imports by increasing domestic production, as local farmers are incentivized to grow more apples with government support, reducing the amount of apples South Korea needs to import.

💡Opportunity Cost

Opportunity cost is the value of the next best alternative that is forgone when a choice is made. The video explains that the subsidy for South Korean apple producers comes at the opportunity cost of taxpayer money, which could have been used for other government programs like healthcare, education, or infrastructure.

💡Strategic Industries

Strategic industries are sectors deemed critical to a nation's economy or security, such as defense or military technology. The video touches on this concept when discussing situations where protectionism may be justified, suggesting that protecting such industries ensures a nation’s security and independence, even if it leads to deadweight loss.

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