Name: Daniel Vintimilla

Date: December 12, 2014

Unit 2: Microeconomics
Lesson 3: Indirect taxes, subsidies and elasticity
Homework:
Examination Questions
Paper 1, essay questions
1a. Explain why a government might grant a subsidy to the producer of
wheat.
1b. Discuss the consequences of such subsidy.
Covering the needs
A subsidy is a monetary assistance granted by a government to a person or
group in support of an enterprise regarded as being in the public interest.
They aim to increase the demand for necessity goods, by lowering their
costs. Usually subsidies are applied to food, housing, water, gas, electricity,
and other goods that people need to live. However the money invested by
the government in the subsidy, couldve been invested in other areas, such
as health or education. Developed countries tend to provide subsidies to
agricultural development. In this essay I will focus on the United States
subsidies on wheat, to demonstrate the reasons and consequences of
granting subsidies to wheat producers.
In 2012 The United States granted a 1,1 billion dollar subsidy to wheat
producers only. Such a investment is only afforded by the US due to the
numerous amounts of benefits that the country receive for the subsidy.
Wheat is the most important and consumed carbohydrate in the entire
world. But wheat is not only important because it can feed the population,
but wheat is also used to create biofuels; these applications grant wheat a
very important role in the US.
How does a country benefit from granting a subsidy to wheat producers?
When granting a subsidy, the country government provides the wheat
producers money so they can increase their supply, via buying more land,
fertilizers, and seeds. By doing this the government ensures that wheat
prices inside the US decrease and demand increases.
The price decrease for wheat due to subsidies, mean that Americans will
have easy access to wheat, increasing the demand for the product. In the
diagram (Figure 1) there is supply shift to the right because of the subsidy,
the shift increases wheat supply, lowering price while increasing the
demand. This shows the caring of the government for the countrys
population, and its efforts to feed every US citizen. This is the first benefit of
granting a subsidy on agricultural products.

The second advantage of granting such assistance to wheat producers is the

gain of a competitive advantage over other countries. Because, the US
producers will lower their prices due to subsidies, they can export the wheat
surplus at a lower price meaning that at the international market American
wheat will be more valued as it is cheaper, meaning a higher international
demand. The graph (Figure 2.1) shows how because of the subsidy the
international market prefers US wheat over others. Countries without
subsidies cannot lower their prices, and acquire a competitive disadvantage
against competitors. In Figure 2.1 we can compare how demand is lower
when no subsidy is applied.
The third advantage of granting a wheat subsidy is the opportunity for the
country to use the extra supply to produce biofuels. Such is the cases that
by increasing the biofuels production, the price of them also decreased,
granting even more advantages for the country.
The final advantage is the market expansion for agricultural companies.
Because of the subsidy companies will increase their production, but for
doing it, they will hire more workers, reducing unemployment and increasing
GDP per capita.
The granting of the subsidy to agricultural products offers high benefits to
the country, including, cheap nutrition for the country, international
competitive advantage, and the economic growth the country will
experience. While all the consequences for the country granting the subsidy
are positive, the only negative effect of the subsidy is its opportunity cost,
the investment on more issues with higher priority.

Price

Figure 1.1 Subsidy on wheat production

DC

P2
P1
Pe
C

AD

BC

Q1 Qe

Price

S - subsidy

International Wheat Demand

S

DC

P2
P1
Pe
C

Quantity

S - subsidy

AD
G

BC
E

Q1 Qe

Quantity

Bibliography

"United States Wheat Subsidies || EWG Farm Subsidy Database." United States Wheat
Subsidies || EWG Farm Subsidy Database. N.p., n.d. Web. 21 Dec. 2014.
"Biofuels Make a Comeback Despite Tough Economy." Biofuels Make a Comeback Despite
Tough Economy. N.p., n.d. Web. 21 Dec. 2014.
"Wheat Production in the United States." Wikipedia. Wikimedia Foundation, n.d. Web. 21
Dec. 2014.

"Agricultural Subsidy." Wikipedia. Wikimedia Foundation, n.d. Web. 21 Dec. 2014.