Question

1) Explain how government use of subsidies can be counterproductive, give 3 examples.

2) Explain how government use of taxes to decrease consumption can be counterproductive. Give 3 examples.

Answer 1

1) subsidy is used by government to support producers against low prices, but this can be counterproductive.

i) shortage- producers are sometimes not able to cope up with the increased demand, consumers demand more because they now need to pay lower prices. Due to overconsumption products fall short of demand.

ii) inefficient transfer of subsidy amount- It has been found that total amount of subsidy is not transferred to sellers and producers. Due to inefficiencies in the market, fraction of money is gone to households.

iii) decrease in consumption- the burden of subsidy is borne by public in the form is taxes. Government increases taxes in order to subsidy. Increase in taxes reduces the consumption demand.