Do federal subsidies lower the price of a good or raise the price of a good?
Two examples to illustrate each point.
In the case of subsidizing education via federal loan programs, it would appear that the price of an education goes up, as there is more money chasing educational institutions. Take away the subsidies, and the price of and education would go down.
In the case of subsidizing corn famers, it makes corn cheaper for those that consume corn. Take away the subsidies, and the price of corn would go up.
What is the logic of subsidies? Do subsidies make prices of goods go up or down?
Corn subsidies are paid out on a per-unit basis, I believe. That is, the more corn you produce, the more you get paid. This leads to an overproduction of corn, and the price becomes very cheap as there’s much more supply. With education, at least in the case of colleges, the consumer, rather than the producer, is subsidised. So people are given money to buy the same amount of product = price goes up. Didn’t think it all the way through but I’d imagine the answer to your question lies in whether it’s the producer or the consumer who’s being subsidised.
“Didn’t think it all the way through but I’d imagine the answer to your question lies in whether it’s the producer or the consumer who’s being subsidised.”
Thanks for your thoughts. Is it really that simple?
Subsidy to Producer: Prices go Down.
Subsidy to Consumer: Prices go Up.
Allow me to chime in with another topical example. Take for instance Planned Parenthood subsidies, which are going to producer. If the logic above is correct, prices of such services should go down. But think of it this way. By subsidizing Planned Parenthood to meet market rates for services, it in turn has raised prices.
In the first example you’re subsidizing the consumer. It increases quantity demanded.
In the second example you’re subsidizing the producer. It decreases the cost of production and increases supply. What happened with corn is that it subsidized corn to increase corn supply for the ethanol market, not for the consumer market. Corn was subsidized as a capital good, in other words.
What happened with corn is that it subsidized corn to increase corn supply for the ethanol market, not for the consumer market. Corn was subsidized as a capital good, in other words.
As far as I know, corn subsidies pre-date the whole ethanol boondoggle by several decades. Going back to the 1920s/30s.
As far as I know, corn subsidies pre-date the whole ethanol boondoggle by several decades. Going back to the 1920s/30s.
They might, but there are probably several different subsidies and all of them offered for different reasons. Some farmers were subsidized to destroy crops, which certainly raised prices. My family (in Spain) is subsidized to grow barley for ethanol (it’s basically free to produce), vineyards, and pine trees, and I’m sure there are hundreds of other goods which are subsidized.
I don’t think those are universal trends. It depends on what you’re subsidizing the producer to do. If you’re subsidizing the producer to produce more of a certain good then you will increase supply in that market. Sometimes, governments subsidize producers to restrict supply on the market (for example, we’re subsidize not to chop down parts of our pine trees, which means less pine wood on the market).
In the case of Planned Parenthood, I’m not sure how it works, but I believe that it’s free to use their services, correct? So, there is the potential for unlimited quantity demanded, and the cost of providing the service is subsidized by the government. This is more or less the same problem that faces universal health care system. There is an incentive for perpetually rising prices, since all the costs are externalized to the taxpayer.