A subsidy is a payment
made by the government to producer. It decreasing the price paid by buyer and
increasing the price receive by sellers. Therefore, when government decrease
the subsidy for the sugar, the price paid by the buyer will increase and price
receive by sellers will decrease. Other than that, when subsidy is decreases,
there is some effect occurs toward the supply. A subsidy is like a negative
tax. A tax is equivalent to an increase in cost, so a subsidy is equivalent to
a decrease in cost. Since the subsidy is decreases, the subsidy brings a
decrease in supply. This is because the subsidy decrease has caused the price
receives by the seller decrease, therefore the seller supply less to the market.
Next, when the subsidy is
decrease, the price paid by consumer increase but decrease the marginal cost of
producing sugar. Marginal cost decrease is because producer makes less sugar,
which means that they use fewer resources to produce sugar, so marginal cost
used decrease. Beside that, it also improves the efficient of sugar
production. This is because subsidy always results in inefficient overproduction.
At the quantity produced with subsidy, marginal social benefit is equal to the
market price, which has fallen. Marginal social cost has increased and it
exceeds marginal benefit, the increased production brings inefficiency.
Therefore, when subsidy is decreases, the inefficient overproduction can be
decrease. For example, Australia and New Zealand have stopped subsidizing
farmers. The result has been an improvement in the efficiency of farming in
these countries. While U.S. and European farm subsidies is strong.
Opposition to farm subsidies inside the United States and the Europe is
growing, but it is not as strong as the pro-farm lobby, so do not expect an
early end to these subsidies.
As we know that sugar is
one of the most common complements goods to supplier. It was goods that used
together with other goods. For example sugar is used in tea, canned drinks,
milk, buns and cake. Therefore when the price of the sugar increases, it will
cause the increase of price of others goods. As the law of demand suggests,
when the price increase, the quantity demanded will decrease. Therefore,
the price of the sugar increases, the demand of white bread will be decreases.
If
government willing to remove white bread, which is a Staple Convenience Consumer
Goods from the price celling, it will able to decrease the illegal trading in
black market. This is because rice ceiling is the government
regulation that makes it illegal to charge a price higher than a specified
level.
The effect of a price
ceiling on a market depends crucially on whether the ceiling is imposed at the
level that is above or below the equilibrium price. I think that a
price ceiling is set above the equilibrium price has no effect. The reason is
that the price ceiling does not constrain the market forces. The force of law
and the market forces are not in conflict. But a price ceiling below the
equilibrium price has powerful effects on a market. The reason is that the price
ceiling attempts to prevent the price from regulating the quantities demanded
and supplied. The force of the law and the market forces are in conflict.
Hence, if the price ceiling is removing, this kind of problem can be avoided.
Furthermore, white bread
also considers as one of the substitute goods. It is a good with a positive
cross elasticity of demand. This means a good's demand is increased when the
price of another good is increased. If goods A and B are substitutes, an increase
in the price of A will result in a leftward movement along the demand curve of
A and cause the demand curve for B to shift out. A decrease in the price of A
will result in a rightward movement along the demand curve of A and cause the
demand curve for B to shift in. An increase in price will result in an increase
in demand for its substitute goods. If two goods have a high substitutability,
the change in demand will be much greater. Thus, economists can predict that a
spike in the cost of a particular brand of detergent will likely result in a
large change in demand for other brands, whereas a change in the price of
pencils will have a much smaller effect on the demand for pens. This is because
most detergents are very similar, and thus have high substitutability, whereas
pencils and pens are only partial substitutes - while they are sometimes
interchangeable, many consumers prefer one over the other and there are some
situations where only one is acceptable, such as pens on legal documents or
pencils on most high-school mathematics homework. Therefore, demand of white
bread and the demand of its substitute good will increase. Therefore,
demand of white bread will decrease and the demand of its substitute good will
increase.
Next, we spend some time
in search activity almost every time we make a purchase. For example, when you
are shopping for the latest smart phone, you would search for the store, which
offers the best deal. So when a price is regulated and there is a shortage,
search activity increases. The opportunity cost of a good is equal not only to
its price but also to the value of the search time spent finding the
good. Searching activity is costly. It uses time and other resources
gasoline that could have been used in other productive ways.
Then, a price ceiling
also encourages illegal trading in a black market. Black market occurs when the
equilibrium price exceeds the price ceiling. The level of black market rent
depends on how tightly the price ceiling is enforced. With loose enforcement,
the black market price is close to the unregulated price. But with the strict
enforcement, the black market price is equal to the maximum price that a buyer
is willing to pay for the white bread. Therefore, government remove the price
ceiling from the white bread would only benefit the supplier but not consumer.
No comments:
Post a Comment