Economics

Study Notes

Producer support in markets

Level:: AS, A Level, IB

Board:: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 19 Jan 2019

There are different types of support available to producers such as farmers in both developed and developing countries. Often times, the intervention has political and social aims as welfare as economic objectives.

Support might include:

Input subsidies such as en employment subsidy or tax relief when purchasing capital equipment
Guaranteed minimum prices
Buffer stock schemes to reduce price volatility
Export subsidies
Grants to cover operating losses

When analysing the effect of interventions in markets, remember to show clearly changes in market price and quantity demanded and supplied. Consider the impact of intervention on levels of consumer and producer surplus.

Some of the main aims of support include:

Lowering prices in markets to encourage an increase in consumption - for example, by increasing the affordability of certain goods and services
Providing financial incentives for businesses in emerging industries such as renewable energy or biotechnology
Stabilising prices and incomes to reduce the risks associated with market volatility
Funding schemes designed to improve the human capital of the workforce and strength the mobility of labour

Evaluating the impact of producer support programmes

Subsidies can distort the working of the free-market price mechanism - e.g. guaranteed minimum prices can lead to a structural problem of excess supply as growers respond to the incentive of a higher-than-normal price
The benefits of subsidies are rarely distributed equitably - always think about who stands to gain most from an intervention. For example comparing the returns to large-scale farmers in contrast to smaller-scale producers
Producer support can have negative unintended consequences - for example subsidising the cost of fertiliser or providing tax relief for capital equipment in farming can clearly help to increase productivity and bring down the unit cost of food production, but there might also be some negative environmental effects including over-use of farm land and excessive rates of deforestation
Who bears the cost of producer support? Does it leads to a higher tax burden and with what possible effects on other industries in an economy?
To what extent does financial support for suppliers lead to a dependency culture and keep inefficient businesses in markets, where free market forces could lead to increased competition and more efficient and innovative suppliers challenge existing firms?

Develop your knowledge and understanding:

Buffer stock schemes

Producer subsidies

Revision presentation on subsidies

Quizlet revision activity on government intervention in markets