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ECO402 GDB Solution & Discussion Last Date:26-01-2017

The Case:
Agriculture is the backbone of the national economy and farmers play a pivotal role to strengthen the economy of the country. Wheat, rice, sugar cane and cotton are important crops of Pakistan. Urea, diammonium phosphate (DAP) are the basic elements in production of crops. Currently, Government of Pakistan has approved the subsidy on urea and DAP fertilizers. The prices of fertilizers before and after the subsidy have been given below.

Fertilizer Weight Price before subsidy Price after subsidy

Urea 50 kg Rs.1790 Rs.1400
DAP 50 kg Rs.2856 Rs.2558

It is expected that this policy of subsidy will create many opportunities not only for farmers but also for suppliers.

After reading the above facts and figure, logically explain that how this subsidy will affect the price of major crops and their supply?

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in this case the supply curve will fall down to right side , if the subsidy is given on different fertilizers the price will be low and supply will be increased..

Eco 402 GDB
A subsidy is money provided by the government to producers or consumers of a specific product. Subsidies operate as rewards to producers and consumers of a given type of product, inducing them to either produce or consume more. Subsidies distinctly affect the supply or demand curves of a product by shifting one or the other to the right.
Supply and Demand Curve
The supply and demand curve for a given product are created by graphing the relationship between price and quantity produced. According to the theory of supply and demand, the real-world price of any given item tends to move toward the point where the quantity produced equals the quantity demanded by consumers; this is the point on the graph where the supply curve intersects the demand curve.
Types of Subsidies
A government can provide two basic types of subsidies to encourage the production or consumption of a certain product. For example, if the government pays car companies a certain amount of money for each environmentally conscious car produced, this is referred to as a supply-side subsidy. If, however, the government provides money or a refund to every consumer who buys an environmentally conscious vehicle, this is a demand-side subsidy. Demand-side subsidies are commonly referred to as rebates.
Effects of Supply Subsidies
When the government provides a supply-side subsidy to the producers of a product, the supply curve shifts to the right and the demand curve remains the same. Because they are being subsidized, producers are encouraged to produce more of a product and are able to do so for less. The price of an environmentally conscious vehicle drops and more are produced. In practice, a supply-side subsidy will cause the demand for a green vehicle to increase.
Effects of Demand Subsidies
When the government provides a demand-side subsidy to consumers, it encourages them to purchase a given product. For example, a tax rebate to consumers who purchase a green car will in theory cause the demand curve for environmentally conscious vehicles to shift up and to the right, while the supply curve stays the same. Because consumers will be paying less, producers can actually increase the price because producers can charge more and consumers are being artificially encouraged to purchase green cars, producers are encouraged to produce more. The price and the quantity produced both increase.



Such financial incentives are offered for farming industries to mitigate the impact agriculture has on the environment, for example by reducing fertilizer use and 'sparing' land for conservation. The new study found this has a positive effect on critical areas such as greenhouse gas reduction and increased biodiversity. The impact of removal of fertilizer subsidies on fertilizer will lead to exposing farmers to higher inputs, resulting in lower yield and higher prices. Hence, it is going to have a negative effect on food security. Fertiliser subsidy seeks to promote fertilizer consumption, increase agricultural productivity and maintain national food security. It has been a point of contention whether such 'cash for conservation' initiatives succeed. For the latest study, researchers aggregated investment in environmental incentives at a national level for the first time, and, by comparing them to broad trends in environmental outcomes, found that paying the agriculture industry to help the environment seems to be working. However, the research team also mapped the proportion of global agricultural production reinvested in environmental incentives, and compared it to the proportion gifted to the industry through government subsidies. The results show big wedges of subsidy compared to small amounts of environmental investment.

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