Microeconomics - consumer subsidy market impact

[lachsa]

Hi,
I am currently studying Microeconomics and am a little stuck on a question. It is in relation to a 'consumer subsidy' provided by the government, my textbook does not cover it and I have been unsuccessful locating anything online as it all seems to be about a producers subsidy; which our tutor has stressed is not what we are being asked. Thus would like to discuss with anyone further if possible for their views or opinions?

Basically as an overview, the govt has decided to fund a $500 rebate (subsidy) to consumers who purchase a rainwater tank (the money is refunded once proof of the purchase is given with the filling out of the appropriate claim paperwork; generally refunded in the form of a credit to their water rates account).

I see the subsidy effectively as a gift of money from the government (hence raising disposable income) to be spent exclusively on rain water tanks.

What would be the impact on the market for rain water tanks of providing such a subsidy to consumers? I have presumed a shift in the demand curve upwards for the period of the subsidy being paid, causing a new equlibrium price.

I was wondering if I should also then discuss if suppliers are impacted(as at this stage I have not changed the supply curve in my diagram), and what happens when the subsidy is discontinued (as they are only funding 500,000 homes), thus the demand will then decrease.
Any thoughts would be greatly appreciated. I have about 400 words to answer this question

Thanks.

 

[imiyakawa]

See the other thread on this in the same forum (it's just below this thread), your question has already been answered thoroughly. There's enough in that thread to anwer the question with 1000 words.

 

[lachsa]

Thankyou for your reply I really appreciate it. I did read the previous thread however was not sure if it actually covered my question as it differs a bit, mine asks for the impact on the market (not industry) and the subsidy is paid as a rebate for a select number of tanks for a limited period of time, after the initial purchase.
Having said that I thought that the impact would differ?

Cheers.

 

[imiyakawa]

There really is no difference in question, market/industry are pretty much synonymous in terms of this question. Don't forget to talk about the effect on the demand schedule as well as the supply curve.

The fact that the rebate is paid after the fact makes no difference, UNLESS the rebate is selective: i.e. only a few people can qualify for it. Then this would have different effects on S/D than if the rebate applied to the every market-player.

 

[Matterwave]

One can always introduce complications to any economic model. For example, one could add the dis-utility consumers feel from filling out forms and keeping track of finances. This would, in general, mean that a $500 dollar rebate is not the same as a $500 discount applied immediately.

Furthermore, for a more detailed analysis, one should conduct a welfare check to see where the rebate is going (is it going to profits? to consumer's surplus? or to dead weight loss?), and whether the rebate is socially efficient (e.g. whether the increase in net utility offsets the costs of the rebate). There's many other kinds of analysis that can be done. Of course, this is all very hard to do without sufficient market data. I don't believe we can do any of this analysis without further information.

For the simplest case, your question should be treated exactly like it was in the other thread.

 

[lachsa]

Hi Imiyakawa and Matterwave,

Thank you for your prompt replies, you have eased my mind and put me back on track.

May I ask one more question with regards to rainwater tanks demand elasticity ( I am still trying to master this concept).

I have the rainwater tanks demand as inelastic for the following reasons:

We are in Australia where due to ongoing drought water is scarce and rainwater tanks are now seen as a necessity.. also for the following factors/reasons:

-range & availability is limited due to few suppliers nationwide
-% of income spent is raised due to subsidy granted as can only be spent on a tank only
-time to buy is limited due to short period of rebate availability and as only first 500,000 applications are eligible

(P.S.- not all people can apply for the rebate you must be a home owner, paying water rates to be eligible and be one of the first 500,000 to be eligible, does this alter the market impact?)

Yours thoughts would be greatly appreciated.

Kind Regards. :)

 

[imiyakawa]

Your question has the potential to be complex.
I'd say that if the subsidy is greater than (>) or = the cost of the rainwater tank, the demand curve will be almost a vertical line but not quite, i.e. almost perfectly inelastic. BUT, at the point where the price of the rainwater tank exceeds the subsidy, elasticity will start to kick in and it'll start looking like a normal demand curve.

My reasoning is that people buy the same quantity of water tanks at any price under the subsidy as it's basically free, $1 or $500 makes almost no difference. Although, it may make a tiny psychological difference if it's very cheap, and also it may actually cause those who haven't heard of the subsidy to purchase the tank, and thus it isn't a vertical line. Normal demand tendencies return in the before-mentioned demand curve when the price exceeds the subsidy.

Although, the following source paints a simplified D/S schedule when talking about the effect of a consumer subsidy which doesn't back up the prior reasoning:
http://www.stanford.edu/group/FRI/indonesia/courses/manuals/multimarket/Output/chapt1.html
To get to the correct point, go to that URL and press CTRL+F and type "consumer subsidy" without quotes and read the few paragraphs under that.

So, I'll have to leave that with you, I'm sorry.

 

[lachsa]

Thank you.
Your last answer has once again put me on track, the subsidy is only a minimum of half the price of a water tank, in many cases much less than the actual cost of purchasing the actual tank (so price so more than exceeds the subsidy), plus installation costs on top (as it must be installed by a licensed plumber), making it quite elastic. I have resolved this question and now know how to explain my answer and will apply it to a graph to back it up.
Thank you for your prompt, valuable advice, assistance and guidance, it is much appreciated all the way from 'Down Under'.
:)

 

[imiyakawa]

I'm from Australia too :)

 

[floppy]

I am also doing the same assignment, finding it quite difficult to grasp. My problem is that with the demand curve would not in fact shift as there is an increase in consumers but wouldn't it just change in the quantity demanded instead and move down the cruve itself? I have been puzzling over this for a while and I can't seem to quite distinguish how the water tanks market would be affected because of the subsidy.