"When government bureaus or enterprises are financed or subsidized by taxes, there is no assurance that people who use the

goods or services value them more than their costs." Is this a potential problem?

ECON 2103.011, Fall 2013 Shelby Kyle Dec 1, 2013

Government subsidies are like most things in life, it can be good or bad. It is positive for companies being subsidized by the state or government is that they get a big check and someone pays for their work regardless. But this can also be a bad thing because the taxpayers do not always value the product or service as high as the price was set. This causes a huge problem and is extremely inefficient. I will be going over several businesses and enterprises that are subsidized by either the state or government and the different types of subsidies by both government and state. In the corn industry ethanol is a pretty famous government subsidy. The Government has been paying 45 cents for every gallon of ethanol produced from 1980-2011. That has equaled up to forty five billion dollars through out the years. The government then has this fuel turned into E85 and sells it for over a dollar loss per gallon. I dont know a whole lot but I do know that it is very inefficient spending. We do not value the ethanol at the break even point so they sell it at a cheaper price so that people will buy it. All of this money spending and be green is all to win over states on election day. Being able to sell corn all day at a high price is great for the farmers but it creates imbalance and inefficiency in the economy. We do not value the ethanol fuel at nearly the price they would sell it at for the break even point. Ethanol fuel gets forty percent less fuel mileage as compared to gasoline and still creates pollution. The RFS mandates that at least 37 percent of the 2011-12 corn crop be converted to ethanol and blended with the gasoline that powers our cars. The ethanol mandate is causing corn demand to outstrip supply by more and more each year, creating a vulnerable market in which even the slightest production disturbance will have devastating consequences for the world's poor(Aziz 1).

Michigan subsidizes up to 32 percent of expenditures for film, television, music video, video game and other media projects done in the state. Michigan subsidized the film program for one hundred and twenty five million dollars and only received an eleven percent return on the investment which equaled thirteen million five hundred thousand. Before the subsidy the company had sixty eight hundred jobs and one year after signing the subsidy the jobs had dropped to fifty three hundred jobs in the Michigan film industry. Film subsidies are an area where scholars are almost united across the political and economic spectrum these programs are not worth the cost. The conservative Tax Foundation found that movie production incentives "are costly and fail to live up to their promises." The liberal Center on Budget and Policy Priorities found film subsidies "a classic race to the bottom" and the economic benefits "more fiction than fact (Skorup 1). That alone shows that subsidies are terrible for the taxpayers because it is not even close to worth the cost. Production subsidy encourages suppliers to increase the output of a particular product by partially offsetting the production costs or losses. This is the method that was used for the corn and ethanol production. This type of subsidy is usually found in already developed markets and it makes the farmers try and over produce. The government buys any and all access so the more the farmers produce the more they are guaranteed to sell. This poses a big problem because it can drive down the global price of the good and the money to store the excess produce. Consumer/Consumption subsidies are most important to developing countries. This usually includes subsidized food, water and electric, the basics that people need to survive. This is a good and positive subsidy because even then the poor can afford to eat and drink. In this type of subsidy it is usually a positive thing and the benefit outweighs the cost for the consumers in the third world countries.

Export subsidy is a support from the government for products that are exported, as a means of assisting the countrys balance of payment. Government does this because by putting a restriction on foreign goods it raises the price and makes domestic option more desirable thus increasing revenue in United States. Employment subsidy serves as an incentive to businesses to provide more job opportunities to reduce the level of unemployment in the country (income subsidies) or to encourage research and development. Consumers can benefit from this type of subsidy but it is not always guaranteed. It does create jobs and make people work for their money instead of sitting around and collecting unemployment. Tax subsidies can create exactly the same outcome through selective tax breaks as through cash payment. For example, a government sends monetary assistance that reimburses 15% of all health expenditures to a group that is paying 15% income tax. Exactly the same subsidy is achieved by giving a health tax deduction. With this type of subsidy individuals see a direct amount from the subsidy and value it accurately compared to cost.
Economists are notorious in their opposition to subsidized industry unless the market,

left to its own dang self, generates a market failure, such as positive externalities. Why so?(Hobbs pg.1) An analysis of the benefit to cost can be determined by Benefit-Cost Analysis The benefits and costs of the subsidy can be assessed by changes in consumer surplus and producer surplus. Since price falls and quantity increases consumers of green energy are made better off: Change in consumer surplus = e + f + g. The price that business firms receive increases since the seller's price is equal to market price (P') plus the subsidy (P" - P'). Since the seller's price rises and quantity sold rises producers of green energy are made better off: Change in producer surplus = b + c. So, considering simply the market impacts the subsidy looks like a

great idea. However, the government sector is involved as well. The cost of the subsidy to the government and tax payers is equal to the product of the subsidy payment (P" - P') and the number of units the subsidy is applied to (Q'): Subsidy payment = b + c+ d + e + f + g + h The overall affect on welfare is the difference between the benefits of the policy and the costs: Net benefits equal change in consumer surplus plus change in producer surplus minus subsidy payment = -(d + h) < 0 The overall net benefits of a subsidy are negative(Hobbs 1). Enterprises and bureaus are often subsidized by tax money. It is not always as straight forward as it seems either. One example is the millions and millions the government is paying a programming company to build Obama care web site. Which should not take nearly that much money and come to find out it is a kid of the high ranking officials business. A classic example of favors being thrown around with tax payers money. By throwing them a bone for the work for the Obama care site and also over paying by an extreme amount it hurts the economy because the money could have been better spent. Going green has become a big part of the economy and trying to convince people to go that direction requires incentives, that means subsidies. Electric cars are the popular going green, headed into the future type of vehicle. Tesla motors makes a one hundred percent electric car and on top of that its a sports car. Tesla has showed the world what is possible with the new technology and improved battery life. Being able travel 265 miles on a charge. The first massmarket electric car designed from scratch, it sports huge trunks in the rear and under the hood, an incredibly low center of gravity, and the ability to hit 60 mph in 4.2 seconds. Plus you can recharge it for the price of a burrito. Named car of the year by Motor Trend, the Model S has recharged Tesla as well. In May, the company announced that it had repaid, nine years early, a $465 million loan it had received from the Department of Energy( Harkinson 1). This is an 5

example of a successful subsidy by the government because they not only profited but payed back their note 9 years early and created a buzz about alternative energy vehicles. The overall net benefits of a subsidy are negative. In other words, the gains to the market participants are worth less than the cost to taxpayers. Subsidies are inefficient. There is no way to know what kind of return the government will get from its subsidies but not all subsidies end up catastrophic. They are all negative in the end but some do produce good things such as a place to live for some people and health care for those who cannot afford it. They also help create jobs by subsidizing companies to hire and train the workers which in turn drives down unemployment and at very least makes the person productive and help give back to the system.

Bibliography Aziz, John R. "It's Time for America to End Ethanol Subsidies - The Week." The Week. Theweek, 31 July 2013. Web. 02 Dec. 2013. Skorup, Jarrett H. "Five Reasons Government Subsidies For Films Are A Bad Idea." [Michigan Capitol Confidential] . Mackinac, 27 Mar. 2013. Web. 01 Dec. 2013. Hobb, Timm G. "Environmental Economics." 'Environmental Economics' Cromulent Economics Blog, n.d. Web. 02 Dec. 2013. Harkinson, Josh. "Taxpayer Subsidies Helped Tesla Motors, so Why Does Elon Musk Slam Them?" Grist. Grist, 4 Oct. 2013. Web. 02 Dec. 2013.