Advantages Of Government Subsidies To Consumers Economics Essay
Subsidy, can be defined as benefits offered by the government to groups, individuals, or industry in various forms such as welfare payment, tax allowance, keep prices low, induce investment to reduce unemployment, and many more. It is also called ‘subvention’. Objective of subsidy is often used to get rid of some burden and considered to be interest of the public. These subsidies should not be misused for any negative activities such as smuggling due to not wasting taxpayers’ effort and hard work.
This report is going to focus on the advantages and disadvantages of government’s subsidies to consumers and farmers. For consumers, in the law of demand, as the price decreases, quantity demand will definitely increase. So as consumers, we don’t really like to purchase goods and services with high price although it is the actual market price.
Advantages of government subsidies to consumers
So in order to reduce our burden, government has already helped us by subsidizing service such as public transportation. Subsidies can be motivated because of social function of public transport. To stay in the society, it is really needy of public transport for those weak groups such as low income households, individuals without driver license, aged pedestrians, persons with handicap, and many more. Public transport subsidies is also a good solution for urban transport problem caused by car such as noise and air pollution, difficulties to have parking slot, traffic jam and congestion, and many more. So if there is more public transportation subsidized, the more cars will be taken away from the traffic, the less pollution and accident will be caused. Besides that, we should consider the mobility of travelers too. Travelers in every country will like to take public transports to reach their destination due to renting vehicles is too expensive. So increase in travel volume will lead to a supply response in terms of higher frequencies and decrease scheduling cost of every traveler (Button, 1993).
In US, it shows that adding two new lanes on highways can only provide short term solution for congestion problem, but it doesn’t have any positive effect on pollution and environmental problems. So for our indemnity, adding two track rail lines can actually be a long-term solution for traffic congestion if citizens actually use it. A light-rail train can at least take away a dozen cars off the road while a commuter-rail train can take off even more as these public transportation can actually remove air pollution by a big mass (BA, 2000).
Besides that, government has also introduced housing subsidies to us. Individual or family’s purchases of house can be indirectly subsidized by the government to allow cheaper houses to be built. In US, lower-income families are able to purchase cheap housing in an area called ‘Section 8’. In the aim of reducing poverty, US government has successfully ensure that more families have their shelter (Lichtenstein)
In China, there are many cases of subsidizing housing to many poor families. A 48 years old man with his family has lived in a 50-square meter apartment without paying rent since June 2011 because of government subsidies. Low-income families can also get subsidized housing even in the big city, Beijing. For example, a man and his wife who are in their 70s, moved into a public rental unit in Beijing’s Shijingshan district and allowed to pay 25% lower rent and this rate will remain stable no matter any increase rate of rent of that district. For fresh graduates or young couples, they can pay a low rent for government subsidized houses. These subsidized houses have saved about 26 million low income urban families in the end of year 2010. So in order to avoid cheating, applicants should be cooperative with Supervision Departments to have verification to approve subsidized houses. Once applicants are caught cheating, they are not able to apply subsidized houses for another 5 years, while in Hong Kong, those cheaters will face a fine or even a court charge (Zheng, 2012)
Disadvantages of government subsidies to consumers
Reducing sugar subsidies
But there will be disadvantages for subsidizing consumers too. For example, sugar subsidization should be reduced as well. Since sugar is not a basic necessity but a harmful substance to our health, removal of subsidy should be positively enhancing our health. Moreover, withdrawal of subsidy of sugar will not bring to acute increase of food and drinks such as soft drinks, pastries, juices, pickled products, and many more. These subsidies benefit soft drinks manufacturers most such as Coca-Cola. Malaysians have been found that there was an increase of 4 teaspoons of sugars from 17 to 21 from 1970s to 1980s. Over consumptions of sugars will cause some deadly disease such as diabetes, heart cancer, asthma, and many more. These subsidies should be actually used to help reducing poverty programs and medical facilities instead of causing any health problem to anyone of us.
Reducing fuel subsidies
Besides that, government should also start reducing fuel subsidies too. A high subsidy on fuel will bring to less budget spending on other potential development fields such as infrastructure, supply of clean water, education, and many more. The subsidies should actually be divided by a suitable proportion to every field instead of favoritism on fuel subsidization only; otherwise, it will cause ‘Welfare Loss’. It is also found that fuel subsidies benefited the rich more than the poor. In India, although electricity and fuel are being subsidized for low-income consumers, there is still more than 40% of subsidized electricity and fuel leaked to black market. This has caused failure of helping needy families to have cheap fuel and caused enrichment of political cronies. Since Malaysia is the border between Singapore and Thailand, there seems to be some smuggling business of fuel and caused big difference of fuel price between Malaysia and its neighbor (Sam, 2012).
Advantages of government subsidies to farmers
Fertilizers & Pesticides subsidies
For the second focused group which is the farmers, government has also subsidized farmers in a proper way. Agricultural subsidies are aim to support farmers’ operation. These subsidies can be provided directly and indirectly. For examples, cash payments, low-cost crop insurance, keep prices low, and so on.
In Sri Lanka, the government has the program to ensure the paddy farmers to have a fixed price for fertilizers by paying importers to cover up the difference between fixed price and imported cost, for example in 2010, 50kg bag of fertilizer was reported for just USD 3.07(Tibbotuwawa, 2010). While in India, government started to subsidy to support environmental revolution by spending to keep down the cost of fertilizer, irrigation of water, and rural electricity. Besides that, the government also nationalized some banks in order to provide financial credits to farmers at preferential rate. For these two countries, there is short and medium term of impact on raising output and most importantly, the reduction of poverty (Smith & Urey, 2002).
In Japan, the Democratic Party of Japan (DPJ) government was recommended to rectify problems by compensating the farmers’ losses. In 2010, Japanese government decided to offer incentives to encourage farmers to expand their operations to help improve efficiency and competitiveness in the agricultural sector. The incentives, which will be tacked on to uniform benefits under the income compensation program for individual farming households, will be extended to farmers that increase the area under cultivation of rice and several other specified products. Rice farmers can be also compensated if they suffer larger amount than expected loss. Under the scheme, all farmers that put their rice on the market are eligible for a uniform ¥15,000 in direct income subsidy per 1,000 square meters of land. (Hays, 2008).
Disadvantages of government subsidies to farmers
Driving small farmers out of business
While for the disadvantages of subsidizing farmers, it means that forms of subsidization are being used in not a good way or it benefits non-target group. There are some cases which were about driving small farmers out of business. Economist estimate that subsidies inflate the value of farmland by 30% and caused prevention of young people farming due to starting the farm will be excessively expensive while there are still other expenses including purchasing machines and stocks, hiring employees. Large farms will often use their massive subsidies to acquisition other small family farms and made 3 quarters of rice farms turned into tenant farms. They often succeed due to they are able to produce large quantity of food in low price, or we can call this as the ‘economies of scale’ (Riedl, 2007).
Import Barriers & Environmental Damaging
In US, farm subsidies and agricultural import barriers caused a serious fence while progress in global trade agreements is being made. For example, in US sugar protection, it only benefits a very small group of US growers but costs a blocking of broader free trade. Next, farm programs also damage environment. Farmers who are producing in region of better soil and climate are able to use less fertilizers and pesticides but those who are in poor locations will tend to use more on their crops. Excessive use of chemicals will cause pollution at rivers and other water supply. In the other way, vast water empire which was run by government, sells water to farmer at reduced price. Overuse of this water could lead to water crisis as the population of western of US continues to rise. Without subsidies, farming can actually be stronger and more innovative industry due to entrance of new entrepreneurs (Edwards, 2009)
So as conclusion, government has actually done many good projects and launched many potential schemes to offer help on us, as consumers, and farmers, as agricultural workers. It did reduce burden and poverty in a great percentage. We should really appreciate help from them and make the economy becomes better and better. It is unfortunate that there are still many unfair parties use these subsidies to create their own profit and caused needy individuals to suffer for another longer period when they are still craving for help from their trusted government.
(Total 1606 words)
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