Chapter 31
Market Based Externalities

I. Government Subsidies Provide Externality

II. Benefits. Subsidies, Direct Controls ,Taxes Affect Equilibrium

III. Why Free College Doesn't Make Sense

IV Agriculture Markets

V. Government Dependency Index

VI. Public Choice Theory

VII. Wikipedia on Subsidies

Capitalism and Political Economy
Public Sector Helps When Markets Fail

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 Each Political Party Wants Voters to Sacrifice Choose One

 I. Government Subsidies Provide Externality Benefits at a Cost
       A. The need for government subsidies lie somewhere between
            the "clear" benefit of lowering the externality costs of severe
            pollution to the questionable economic benefit of "pork
            barrel" (political patronage) programs often generated by
            logrolling (trading votes in congress). See
Golden Fleece Award
       B. Often the desire by consumers to receive a surplus is balanced
           with industry's desire for increased economic rent.
      C. 7 min. supply and demand video Marginal University
      D. Unintended Consequences of Government Subsidies
 E. Goal: Increasing Productivity of Federal Infrastructure Spending

Energy Subsidies Return on Investment

source: energy subsidies paper

Oil/Gas Got the Most Help





F. The Next Big Problem?



G. Readings
1. The Bailouts of 2007-09 results are in. 6/14/15
2. U.S. Political Economy Controversies  Who should be helped?
3. One-Page Economic Issues  Government Involvement Issues
4. U.S. Government and Politics course materials
5. U.S. Political Economy course materials
Energy Tax Breaks
7. Child and Youth Well-Being
8. Economics of Subsidizing Sports Stadiums
Is Financial Aid Welfare?
Yup Rent Control Does More Harm Than Good

H. Videos
1. Taxes and Subsidies     
2. Taxes on Buyers and Sellers   
3. Tax Incidence 
4. Tax Revenue and Welfare
5. Dead Weight Loss
6. Subsidies

II. Subsidies, Direct Controls and Taxes Affect Equilibrium

1. Affecting demand
a. Tax credits, tax preferences, and loan programs to agriculture and education...
         increase taxpayer  demand by the taxpayers' marginal tax rate.
    b. Government supports industries like defense and agriculture with large purchases.
2. Affecting supply
    a. Supporting industries such as agriculture and education with subsidies (loans,
        inexpensive insurance...) increases supply lowering price, increasing quantity sold. 
    b. Organizations such as the Export-Import Bank of the United States, which
        supports export industries, have similar effects.
c. The Clean Air Act of 1990 limited pollution by decreasing supply because
        this increase in marginal cost.


Since the Great Inflation of the 1970s, education, medical and energy sector monopolies restricted supply, while demand grew causing consumer prices to inflate (see figure) more than wages have risen. Energy is nearly a third of transportation costs and a tenth of housing and agriculture cost.

Public education controls 92 percent of K-12 and
78 percent of higher education.

Colleges preferential government funding provided 
A substantial amount of revenues.

Since 1980, college enrollment up 150%
while four-year colleges up  50%.

Government increased demand and prices in
medicine with the passage of Medicare and Medicaid.



Setting a Wage Floor Worked in NYC



III. Why Free College Doesn't Make-Sense

"If businesses are having trouble attracting skilled workers, then they should increase pay until it becomes worthwhile for people to acquire the requisite skills. The Law of Supply holds for labor markets: people want to earn more money, so they will acquire in-demand skills if the price is right. If tuition is too expensive, then companies must increase pay until paying it becomes worthwhile for the student. We see this phenomenon at all degree levels: medical school is expensive, but people are willing to borrow for it because being a doctor pays well.

However, Kentucky’s free college helps businesses skirt the Law of Supply. Rather than increasing pay to make learning skills worthwhile for workers, businesses will simply allow taxpayers to shoulder the costs of training. It’s corporate welfare by another name.

This analysis is adapted report published by
 Americans Against Monopolies

China’s Systematic Approach to Poverty Reduction


Why Do Students Enroll In
Massively Oversupplied-University Degrees



Jobs, Pay, and Skills for 3.5 Million People

Student Advancement


Education Affects Income

Choosing a College/Major  

Majors Not Equal

Personal Advancement

Homework Help


Individual Advancement
Self Improvement

Meeting People 

Career Advancement

Education Improvement

Overcome Negativity Bias

Understanding Media Negativity

TOFEL    AP, SAT Test Prep


New White House Report makes case that poverty is overstated


See Why is Poverty Controversial?


IV. Agriculture markets (both buyers and producers)
       A. Farers sell in an uncertain domestic market 
          Foreign Markets make this much less of a problem
         1. Demand is very inelastic as people's physical needs
             are limited and lowering price will not substantially
            increase quantity sold.
         2. Demand increases slowly for most agricultural
             products as many are inferior goods for which
             quantity demanded decreases as income increases.
         3. Supply is very inelastic in the short run as crops grow
         4. Supply is volatile because of the weather.
         5. Technology has caused supply to increase substantially.
         6. Annual supply fluctuations cause the prices farmers
             and resulting revenue to fluctuate considerably.

    B. Solving the farm problem with price supports using
         parity pricing. 
         1. Prices received by farmers should be kept high
             enough to allow a certain amount of agricultural
             output to purchase constant amounts of goods
             and services.
             a. A ratio of prices received for crops to prices
                 paid by farmers to live was created using data
                 from 1910 to 1914 as a base.

Supply and Demand for farm products
 is inelastic

so Increased supply causes
 revenue to drop.

Image result for farm aid cartoons

              b. 100% parity would mean each dollar earned
                   would have a constant value, i.e., revenue from
                   a bushel of corn would always buy a toothbrush.
        2. Methods of achieving parity pricing
             a. Increase demand
                 1) Provide programs for the needy
                     (school lunch program). 
                 2) Direct purchase and storage.
                 3) Encouraging the free international
                     trade of agricultural
             b. Regulate supply with soil conservation
             c. Decrease risk with subsidized crop insurance
                and inexpensive loan programs.
        3. Historically prices paid by farmers have increased
             more rapidly than prices received. 
            a. This caused a decline of the family farm
                and the industrialization of agriculture. 
            b. These changes have complicated
                questions concerning agricultural policy.
    C. Price supports are basically a price floor resulting in
         higher prices and a surplus of production.
    D. The question of consumer surplus and 
         economic rent need to be addressed.
         1. In 1991 federal appropriations for agriculture were
             $52 billion, of which more than $30 billion were
             subsidies designed to keep farm prices high.
         2. Government activity to help farmers adds
              approximately $400 annually to the cost of food
              purchased by the average American family of four.
     E. Stuff from the Internet
Teacher's Corner: Paying for Farm Subsidies
Agricultural Economics and Policy  42 min video
         3. Farmers Don't Need New Federal Subsidies
         4. New Zealand got rid of Farm Subsidies
     F. For more read
         1. Sports Pork
         2. 20 Federally Supported Innovations
7 reasons roads bridges and tunnels cost way more in U.S
         4. Presidential Issue Entitlements

1. U.S.

US Spends the Least for Food
6.6% $2,273 $34,541
2. Singapore 7.3% $1,422 $19,398
3. U.K. 9.1% $2,214 $24,260
4. Canada 9.6% $2,679 $27,761
5. Austria 10.1% $2,617 $25,908
6. Ireland 10.1% $2,037 $20,093
7. Australia 10.2% $3,814 $37,492
8. Germany 10.9% $2,481 $22,762
9.Switzerland 11.0% $4,943 $44,899
10. Denmark 11.1% $3,036 $27,306

   U.S. Necessity Spending Down


Economic Questions: 
Do Economists Lie?

For Trump
Increase Economies Growth 
Tax Cuts Success?
Inflation's Back, Trouble Ahead?  
4. Stocks Too High?  
5. Recession Coming?

Long-Term 1. Will Inflation/Growth Tame Deficits 
2.  Will Debt End Capitalism 
3. Job Loss to AI 
4. Dollar Privilege Continuation 
5."> Russia/China U.S. Adversaries

USDA ERS - Farm Household Income and Characteristics

"Farmers will receive twice as much of their income from handouts (25%) this year as they did in 2013, according to the USDA … big farmers snare the vast majority of federal handouts. According to a report released this year by the Environmental Working Group … the top 1 percent orm subsidy recipients received 26 percent of subsidy payments between 1995 and 2014." The group’s analysis of government farm-subsidy data also found that the “top 20 percent of sub Fifty members of the Forbes 400 list of wealthiest Americans have received farm subsidies recipients received 91 percent of all subsidy payments." , according to the group, including David Rockefeller Sr. and Charles Schwab."




Farmer Doing Great


And Subsidies Up


BUT Wall Street Journal Sees Trouble


The Next American Farm Bust Is Upon U.S.



V. 2012 Index Dependence Government

 The great and calamitous fiscal trends of our time—dependence on government by
 an increasing portion of the American population, and soaring debt that threatens the financial integrity
 of the economy—worsened yet again in 2010 and 2011. 

See -

Chart Book: Economic Security and Health Insurance Programs Reduce Poverty and Provide Access to Needed Care












Companies with the biggest tax subsidies over the eight years,
the institute’s report said, included

■ AT&T ($38.1 billion) 
■ Wells Fargo ($31.4 billion) 
■ JPMorgan Chase ($22.2 billion) 
■ Verizon ($21.1 billion) 
■ IBM ($17.8 billion) 
■ General Electric ($15.4 billion) 
■ Exxon Mobil ($12.9 billion) 
■ Boeing ($11.9 billion) 
■ Procter & Gamble ($8.5 billion) 
■ Twenty-First Century Fox ($7.6 billion) 
■ Time Warner ($6.7 billion) 
■ Goldman Sachs ($5.5 billion)



Plug-in Electric Vehicles Subsidies


Federal Spending Some States Are More Equal Than Others

"Naturally, these values aren't spread evenly within the states themselves, either. Areas that are more rural and reliant on agriculture will tend to be net tax receiver areas both because farmers and ranchers receive a lot of government subsidies, and also because agricultural work tends to have lower productivity than urban work.

Urban areas, in contrast, produce most of the tax revenue, so highly urbanized states will tend to more often be "break even" or "net tax payer" states.

Other Considerations

One thing that must not be ignored is the fact that the US government spends more than it takes in nationwide. During 2013, for example, the federal government spent a dollar for every 80 cents it took in via taxes.

Nationwide, the tax-spending ratio is not one dollar, but it about $1.20. So, states that are getting around $1.20 back for every dollar extracted in taxes are really just at the national average."



Has Safety Net Adjusted Enough
See Middle Class Economics








Primary Source

Editor's Note:

A similar analysis adding the present value of Medicare and Social Security
to welath by income class would be interesting.


VI. Public Choice Theory Library of Economics and Liberty

VII. Wikipedia on subsidies





from /the-senate-is-voting-on-a-955-billion-farm-bill-heres-whats-in-it/\

By Brad Plumer, Washington Post, 610/13

senate farm bill





This article needs additional references or sources for verification
Please help improve this article by adding reliable references. (help, get involved!)
Unverifiable material may be challenged and removed.
This article has been tagged since February 2007.

Overview on Subsidies

In standard supply and demand curve diagrams, a subsidy will shift either the demand curve up or the supply curve down. A subsidy that increases production will result in a lower price while a subsidy that increases demand will tend to result in an increase in price. Both cases result in a new Economic equilibrium.

Therefore it is essential to consider elasticity when estimating the total costs of a planned subsidy: it equals the subsidy per unit (difference between market price and subsidized price) times the new equilibrium quantity.

One category of goods suffers less from this effect: Public goods are — once created — in ample supply and the total costs of subsidies remain constant regardless of the number of consumers; depending on the form of the subsidy, however, the number of producers demanding their share of benefits may still rise and drive costs up.

The recipient of the subsidy may need to be distinguished from the beneficiary of the subsidy, and this analysis will depend on elasticity of supply and demand as well as other factors.

For example, a subsidy for consumption of milk by consumers may appear to benefit consumers (or some subset of consumers, such as low-income households); but if supply of milk is constrained and results in higher demand and higher prices, the milk producer may benefit and the consumer may derive no net gain, as the higher prices for milk offset the subsidy. The net effect and identification of winners and losers is rarely straightforward, but subsidies generally result in a transfer of wealth from one group to another (or transfer between sub-groups).

Subsidy may also be used to refer to government actions which limit competition or raise the prices at which producers could sell their products, for example, by means of tariff protection. Although economics generally holds that subsidies may distort the market and produce inefficiencies, there are a number of recognized cases where subsidies may be the most efficient solution.

In many instances, economics may (somewhat counter-intuitively) suggest that direct subsidies are preferable to other forms of support, such as hidden subsidies or trade barriers; although subsidies may be inefficient, they are often less inefficient than other policy tools used to benefit certain groups. Direct subsidies may also be more transparent, which may allow the political process more opportunity to eliminate wasteful hidden subsidies. This problem - that hidden subsidies are more inefficient, but often favored precisely because they are non-transparent - is central to the political-economy of subsidies.

Examples of industries or sectors where subsidies are often found include

gasoline in the United States


farm subsidies

and (in some countries)
certain aspects of
student loans.


Types of subsidies

There are many different ways to classify subsidies, such as the reason behind them, the recipients of the subsidy, the source of the funds (government, consumer, general tax revenues, etc). In economics, one of the primary ways to classify subsidies is the means of distributing the subsidy.

In economics, the term subsidy may or may not have a negative connotation: that is, the use of the term may not be prescriptive but descriptive. In economics, a subsidy may nonetheless be characterized as inefficient relative to no subsidies; inefficient relative to other means of producing the same results; "second-best", implying an inefficient but feasible solution (contrasted with an efficient but not feasible ideal), among other possible terminology. In other cases, a subsidy may be an efficient means of correcting a market failure.

For example, economic analysis may suggest that direct subsidies (cash benefits) would be more efficient than indirect subsidies (such as trade barriers); this does not necessarily imply that direct subsidies are good, but that they may be more efficient or effective than other mechanisms to achieve the same (or better) results.

Insofar as they are inefficient, however, subsidies would generally be considered by economists to be bad, as economics is the study of efficient use of limited resources. Ultimately, however, the choice to enact a subsidy is a political choice. Note that subsidies are linked to the concept of economic transfers from one group to another.

Economics has also explicitly identified a number of areas where subsidies are entirely justified by economics, particularly in the area of provision of public goods.

Direct subsidies Direct subsidies are the most simple, and arguably the least frequently used citation needed]. They involve a direct cash transfer to the recipient, for example an unemployed person or an agricultural corporation.

Indirect Subsidies Indirect subsidy is a term sufficiently broad that it may cover most other forms of subsidy. The term would cover any form of subsidy that does not involve a direct transfer.

Labor subsidies A labor subsidy is any form of subsidy where the recipients receive subsidies to pay for labor costs. Examples may include labor subsidies and tax deductions for workers in industries, such as the film and television industries. (see: Runaway production)

Tax Subsidy A tax subsidy is any form of subsidy where the recipients receive the benefit through the tax system, usually through the income tax, profit tax, or consumption tax systems. Examples may include tax deductions for workers in certain industries, accelerated depreciation for certain industries or types of equipment, or exemption from consumption tax (sales tax or value added tax).

Production subsidies In certain cases (to encourage the development of a particular industry, for example), governments may provide direct production subsidies - cash payments for production of a given good or service. Frequently, production subsidies are less easily identifiable, such as minimum price policies. Indirect production subsidies may be less easy to identify, such as infrastructure subsidies.

Regulatory advantages Policy may directly or indirectly favor one industry, company, product, or class of producer over another by means of regulations. For example, a requirement that full-time government inspectors (at company expense) be present to inspect meat may favor large producers; conversely, if small producers were not required to undergo meat inspections at all, this may constitute a subsidy to that class of producer. It may not be evident or clear that there is a subsidy in many cases.

Infrastructure subsidies Infrastructure subsidies may be used to refer to a form of indirect production subsidy, whereby the provision of infrastructure (at public expense) may effectively be useful for only a limited group of potential users, such as construction of roads at government expense for a single logging company. The implication is that those users or industries benefit disproportionately from the provision of that infrastructure, at the expense of taxpayers.

In some cases, the "subsidy" may refer to favoring one type of production or consumption over another, effectively reducing the competitiveness or retarding the development of potential substitutes. For example, it has been argued that the use of petroleum, and particularly gasoline, has been "subsidized" or favored by U.S. defense policy, reducing the use of alternative energy sources and delaying their commercial development.

Trade protection (Import) Measures used to limit imports from other countries may constitute another form of hidden subsidy. The economic argument is that consumers of a given product are forced to pay higher prices for a given good than they would pay without the trade barrier; the protected industry has effectively received a subsidy. Such measures include import quotas, import tariffs, import bans, and others.

Export subsidies (trade promotion) Various tax or other measures may be used to promote exports that constitute subsidies to the industries favored. In other cases, tax measures may be used to ensure that exports are treated "fairly" under the tax system. The determination of what constitutes a subsidy (or the size of that subsidy) may be complex. In many cases, export subsidies are justified as a means of compensating for the subsidies or protections provided by a foreign state to its own producers

Procurement subsidies Governments everywhere are relatively large consumers of various goods and services. Subsidies may occur in this process by choice of the products consumed, the producer, the nature of the product itself, and by other means, including payment of higher-than-market prices for goods purchased.

Consumption subsidies Governments everywhere provide consumption subsidies in a number of ways: by actually giving away a good or service, providing use of government assets, property, or services at lower than the cost of provision, or by providing economic incentives (cash subsidies) to purchase or use such goods. In most countries, consumption of education, health care, and infrastructure (such as roads) are heavily subsidized, and in many cases provided free of charge. In other cases, governments literally purchase or produce a good (such as bread, wheat, gasoline, or electricity) at higher prices than the cost of sale to the public (which may require rationing to control the cost).

The provision of true public goods through consumption subsidies is an example of a type of subsidy that economics may recognize as efficient. In other cases, such subsidies may be reasonable second-best solutions; for example, while it may be theoretically efficient to charge for all use of public roads, in practice, the cost of implementing a system to charge for such use may be unworkable or unjustified.

In other cases, consumption subsidies may be targeted at a specific group
of users, such as large utilities, residential home-owners, and others.


Tax breaks and corporate welfare

Main article: Corporate welfare

As previously stated, a common form of subsidy is via a tax break. This is a reduction in the normal rate of a particular class of taxes targeted towards an individual or group of companies. Often this is described as "corporate welfare", although that term is also used as a blanket term for all other forms of subsidies. Larger companies who are planning to open a new factory, for example, shop around for a location which will provide them with the biggest tax breaks in a process called a race to the bottom. Locations provide these tax breaks because they often feel that the benefits of job creation will more than offset the decline in tax revenues. Governments of all levels may do this to encourage employment in under-developed areas. Subsidies are given as protection to smaller producers to help them compete with larger companies, to help correct international trade imbalances, to aid industry deemed critical to national security, and to help industry compete with other countries - due to subsidies being common practice throughout the world.

To some, another way that the government subsidizes industry is by failing to regulate externalities. For example, when a company pollutes, it generates savings for itself at public expense, in the form of environmental degradation and public health costs. Thus a cost of production is absorbed by the public. Some individuals argue that this is a form of subsidy of producers (since producers are not paying the full social cost of production). Even where such externalities exist, it is unclear what the most effective way of compensating for the problem is: traditional economic theory suggests that "internalizing" the costs (to the extent possible) is most efficient. It is unclear, however, whether not compensating for externalities (by internalizing costs, regulations, Pigouvian taxes or other means) amounts to a subsidy.

[edit] Subsidies due to the effect of debt guarantees

Another form of subsidy is due to the practice of a government guaranteeing a lender payment if a particular borrower defaults. This occurs in the United States, for example, in certain airline industry loans, in most student loans, in small business administration loans, in Ginnie Mae mortgage backed bonds, and is alleged to occur in the mortgage backed bonds issued through Fannie Mae and Freddie Mac. A government guarantee of payment lowers the risk of the loan for a lender, and since interest rates are primarily based on risk, the interest rate for the borrower lowers as well.

[edit] Controversy

One of the most controversial classes of subsidies, especially according to publications such as The Economist, are subsidies benefitting farmers in first-world countries. Charity institutions like Oxfam describe such subsidies as dumping millions of surplus commodities (like sugar) on world markets, destroying opportunities for farmers in developing and poor countries, especially in Africa. For example, the EU is currently spending €3.30 in subsidies to export sugar worth €1 Source: Oxfam briefing paper. These subsidies have remained in place even though many international accords have reduced other forms of subsidies or tariffs.

A view, held by Austrian economists and other free-marketers, is that subsidies do, in general, more harm than good by distorting economic signals.

Sometimes people believe profitable companies to be 'bullying' governments for subsidies and rescue packages, an example of rent-seeking behavior. For example, [citation needed] in the case with Australian rail operator Pacific National, the company threatened the Tasmanian Government with a pull-out of rail services unless a subsidization was made.

Historical meaning

In the 15s the subsidy was a tax invented in England by Thomas Wolsey in 1513 that taxed based on the ability to pay. It was created in order that Henry VIII could pay for war with France while maintaining his lifestyle.


See also 

External links

Retrieved from ""

This includes a minimum of $14.7 billion in government subsidies that has gone to the four major league sports —Major League Baseball, the National Football

1. Savings enough to accumulate wealth requires sacrifice.

2. Wealth has always accumulated at the top but now in a
    Flat World local, U.S. winners are world winners.
3. Movie stars like Adam Sandler would have success
    world-wide and an accumulate wealth over $300 million.


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Chapter 31 Class Discussion Questions Table of Contents
Chapter 31 Homework Questions Economics Free Stuff

Individual Issues
Economic Wellbeing

Economic Future of Our Children

Are Child & Youth Protected

Political Issues
Our Democratic Federalist Republic? 

Should Tea Party Share Its Debt Tea?  

Is Politics About the Money?

Has Capitalism Failed?
Elizabeth Warren Blames Oligopolies

Criticism of Modern Capitalism

Capitalism and Political Economy Video

International Issues
The Problem of Terrorism

Recent Terror Information

Free Trade Solution or Problem

Country Issues
Solving the Deficit Problem 

Can We Afford Entitlements

Solving the Lack of Good Jobs

Income Inequality

Middle Income Stagnates

Taxing the Rich

Economics of College

Are America's Students Learning Less?

Can Education Reduce Income Stagnation

Is Financial Aid Welfare?







Education Affects Income

Choosing a College/Major  

Majors Not Equal

Personal Advancement

Individual Advancement

Self Improvement

Meeting People 

Career Advancement

Education Improvement

Overcome Negativity Bias

Understanding Media Negativity

Homework Help


AP, SAT Test Prep