[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:03.32,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.80,0:00:11.42,Default,,0000,0000,0000,,- [Prof. Alex Tabarrok] Today we're\Ngoing to start looking at subsidies.
Dialogue: 0,0:00:11.42,0:00:13.09,Default,,0000,0000,0000,,We're going to move quite quickly
Dialogue: 0,0:00:13.09,0:00:15.87,Default,,0000,0000,0000,,because if you've understood\Nthe material on taxes,
Dialogue: 0,0:00:15.87,0:00:19.10,Default,,0000,0000,0000,,the material on subsidies\Nshould follow pretty easily.
Dialogue: 0,0:00:19.10,0:00:22.50,Default,,0000,0000,0000,,However, if you haven't\Nunderstood the material on taxes,
Dialogue: 0,0:00:22.50,0:00:24.99,Default,,0000,0000,0000,,this is going to be\Neven more mysterious.
Dialogue: 0,0:00:25.22,0:00:27.39,Default,,0000,0000,0000,,So make sure you understand taxes
Dialogue: 0,0:00:27.39,0:00:29.27,Default,,0000,0000,0000,,before we move on to subsidies.
Dialogue: 0,0:00:29.27,0:00:30.14,Default,,0000,0000,0000,,Here we go.
Dialogue: 0,0:00:34.69,0:00:38.89,Default,,0000,0000,0000,,Now a subsidy is really\Njust a negative or a reverse tax.
Dialogue: 0,0:00:38.89,0:00:40.43,Default,,0000,0000,0000,,Instead of taking money,
Dialogue: 0,0:00:40.43,0:00:43.78,Default,,0000,0000,0000,,the government gives money\Nto consumers or producers.
Dialogue: 0,0:00:44.35,0:00:46.76,Default,,0000,0000,0000,,Now here are some\Neconomic truths about subsidy.
Dialogue: 0,0:00:47.11,0:00:50.11,Default,,0000,0000,0000,,Who gets the subsidy\Ndoes not depend
Dialogue: 0,0:00:50.11,0:00:53.01,Default,,0000,0000,0000,,on who receives the check\Nfrom the government.
Dialogue: 0,0:00:53.01,0:00:55.99,Default,,0000,0000,0000,,Once again,\Nthe legal incidence of the subsidy --
Dialogue: 0,0:00:55.99,0:00:57.19,Default,,0000,0000,0000,,who gets the check --
Dialogue: 0,0:00:57.19,0:01:00.56,Default,,0000,0000,0000,,is not the same\Nas the economic incidence.
Dialogue: 0,0:01:00.96,0:01:03.15,Default,,0000,0000,0000,,That should always\Nalready be familiar
Dialogue: 0,0:01:03.15,0:01:05.04,Default,,0000,0000,0000,,from our discussion of taxes.
Dialogue: 0,0:01:05.72,0:01:08.60,Default,,0000,0000,0000,,Similarly, who benefits from the subsidy
Dialogue: 0,0:01:08.60,0:01:10.31,Default,,0000,0000,0000,,does depend
Dialogue: 0,0:01:10.31,0:01:13.82,Default,,0000,0000,0000,,on the relative elasticities\Nof demand and supply --
Dialogue: 0,0:01:14.15,0:01:15.97,Default,,0000,0000,0000,,again, just as with taxes.
Dialogue: 0,0:01:16.39,0:01:20.02,Default,,0000,0000,0000,,Finally, subsidies must\Nbe paid for by taxpayers,
Dialogue: 0,0:01:20.02,0:01:21.32,Default,,0000,0000,0000,,so instead of revenues,
Dialogue: 0,0:01:21.32,0:01:23.29,Default,,0000,0000,0000,,there's a cost to a subsidy.
Dialogue: 0,0:01:23.60,0:01:27.28,Default,,0000,0000,0000,,And they create\Nan inefficient increase in trade,
Dialogue: 0,0:01:27.28,0:01:29.61,Default,,0000,0000,0000,,also called a deadweight loss.
Dialogue: 0,0:01:29.84,0:01:31.42,Default,,0000,0000,0000,,Let's take a look in more detail.
Dialogue: 0,0:01:31.42,0:01:33.87,Default,,0000,0000,0000,,Okay, we have a lot to cover\Nin this diagram
Dialogue: 0,0:01:33.87,0:01:35.07,Default,,0000,0000,0000,,so put on your thinking hats.
Dialogue: 0,0:01:35.07,0:01:38.01,Default,,0000,0000,0000,,We begin as usual at the Market --\Nfree market equilibrium.
Dialogue: 0,0:01:38.01,0:01:41.78,Default,,0000,0000,0000,,Let's say that's at price\Nof two dollars and this quantity.
Dialogue: 0,0:01:42.31,0:01:44.59,Default,,0000,0000,0000,,Now, I'm not going\Nto go through the proof
Dialogue: 0,0:01:44.59,0:01:48.52,Default,,0000,0000,0000,,that the legal incidence\Nof who gets the subsidy
Dialogue: 0,0:01:48.52,0:01:51.27,Default,,0000,0000,0000,,does not influence\Nthe economic incidence.
Dialogue: 0,0:01:51.64,0:01:55.13,Default,,0000,0000,0000,,Instead, I'm going\Nto jump right to the key point,
Dialogue: 0,0:01:55.13,0:01:57.48,Default,,0000,0000,0000,,which is that a subsidy drives a wedge
Dialogue: 0,0:01:57.48,0:02:01.79,Default,,0000,0000,0000,,between the price received by sellers\Nand the price paid by the buyers.
Dialogue: 0,0:02:01.79,0:02:03.70,Default,,0000,0000,0000,,The only difference from the tax
Dialogue: 0,0:02:03.70,0:02:07.32,Default,,0000,0000,0000,,is that the price received\Nby sellers with the subsidy
Dialogue: 0,0:02:07.32,0:02:10.47,Default,,0000,0000,0000,,is going to be more\Nthan the price paid by the buyers.
Dialogue: 0,0:02:11.54,0:02:15.21,Default,,0000,0000,0000,,So we can use the same\Nwedge analysis that we used before
Dialogue: 0,0:02:15.21,0:02:17.16,Default,,0000,0000,0000,,except we're going\Nto drive the wedge
Dialogue: 0,0:02:17.16,0:02:19.29,Default,,0000,0000,0000,,into the diagram\Nfrom the right hand side.
Dialogue: 0,0:02:19.59,0:02:21.67,Default,,0000,0000,0000,,So now consider\Nthe height of this wedge --
Dialogue: 0,0:02:21.67,0:02:23.42,Default,,0000,0000,0000,,let's suppose that's a dollar --
Dialogue: 0,0:02:23.42,0:02:27.50,Default,,0000,0000,0000,,and let's drive it in to the diagram\Nuntil the top hits the supply curve
Dialogue: 0,0:02:27.50,0:02:29.70,Default,,0000,0000,0000,,and the bottom\Nhits the demand curve.
Dialogue: 0,0:02:29.70,0:02:32.35,Default,,0000,0000,0000,,This is now going to tell us\Neverything we need to know.
Dialogue: 0,0:02:32.35,0:02:34.50,Default,,0000,0000,0000,,So at the top, at point B,
Dialogue: 0,0:02:34.50,0:02:37.12,Default,,0000,0000,0000,,this tells us the price\Nreceived by sellers --
Dialogue: 0,0:02:37.12,0:02:38.96,Default,,0000,0000,0000,,suppose that's $2.40.
Dialogue: 0,0:02:38.96,0:02:41.59,Default,,0000,0000,0000,,The bottom, at point D,
Dialogue: 0,0:02:41.59,0:02:44.90,Default,,0000,0000,0000,,tells us the price\Npaid by the buyers -- $1.40.
Dialogue: 0,0:02:44.90,0:02:47.75,Default,,0000,0000,0000,,Notice that the price\Nreceived by the sellers
Dialogue: 0,0:02:47.75,0:02:50.24,Default,,0000,0000,0000,,has got to be $1 more
Dialogue: 0,0:02:50.24,0:02:52.41,Default,,0000,0000,0000,,than the price paid by the buyers,
Dialogue: 0,0:02:52.41,0:02:55.18,Default,,0000,0000,0000,,the $1 coming from the subsidy.
Dialogue: 0,0:02:55.79,0:02:58.50,Default,,0000,0000,0000,,Notice also the key idea --
Dialogue: 0,0:02:58.50,0:03:01.71,Default,,0000,0000,0000,,it doesn't matter\Nwhether the suppliers
Dialogue: 0,0:03:01.71,0:03:04.32,Default,,0000,0000,0000,,receive the check\Nfrom the government,
Dialogue: 0,0:03:04.32,0:03:08.44,Default,,0000,0000,0000,,or whether the buyers receive\Nthe check from the government.
Dialogue: 0,0:03:08.44,0:03:11.15,Default,,0000,0000,0000,,On net, when all is said and done,
Dialogue: 0,0:03:11.15,0:03:14.55,Default,,0000,0000,0000,,the sellers will receive\N$2.40 per unit,
Dialogue: 0,0:03:14.55,0:03:17.68,Default,,0000,0000,0000,,and the buyers\Nwill pay $1.40 per unit.
Dialogue: 0,0:03:18.03,0:03:20.80,Default,,0000,0000,0000,,By comparing\Nwith the free market price,
Dialogue: 0,0:03:20.80,0:03:25.15,Default,,0000,0000,0000,,we can see who is getting\Nthe relative gain from the subsidy.
Dialogue: 0,0:03:25.15,0:03:26.06,Default,,0000,0000,0000,,In this case,
Dialogue: 0,0:03:26.06,0:03:30.08,Default,,0000,0000,0000,,both the suppliers and demanders\Nget some of the gain.
Dialogue: 0,0:03:30.08,0:03:33.27,Default,,0000,0000,0000,,So the suppliers\Nused to get $2 per unit --
Dialogue: 0,0:03:33.27,0:03:37.14,Default,,0000,0000,0000,,now they're getting $2.40,\Nso they get 40% of the gain.
Dialogue: 0,0:03:37.52,0:03:40.04,Default,,0000,0000,0000,,The buyers used to pay $2 --
Dialogue: 0,0:03:40.04,0:03:44.55,Default,,0000,0000,0000,,now they're paying $1.40,\Nso they get 60% of the gain.
Dialogue: 0,0:03:44.96,0:03:46.56,Default,,0000,0000,0000,,Who gets the gain
Dialogue: 0,0:03:46.56,0:03:47.73,Default,,0000,0000,0000,,is going to depend upon
Dialogue: 0,0:03:47.73,0:03:50.59,Default,,0000,0000,0000,,the relative elasticities\Nof supply and demand
Dialogue: 0,0:03:50.59,0:03:52.66,Default,,0000,0000,0000,,and you want\Nto convince yourself of that
Dialogue: 0,0:03:52.66,0:03:54.89,Default,,0000,0000,0000,,by drawing some more\Ndiagrams like this,
Dialogue: 0,0:03:54.89,0:03:57.50,Default,,0000,0000,0000,,but draw them with\Na really inelastic supply curve.
Dialogue: 0,0:03:57.50,0:03:58.73,Default,,0000,0000,0000,,See what happens.
Dialogue: 0,0:03:58.73,0:04:01.72,Default,,0000,0000,0000,,Then draw it with a more\Nelastic supply curve,
Dialogue: 0,0:04:01.72,0:04:04.68,Default,,0000,0000,0000,,a supply curve which is more\Nelastic than the demand curve.
Dialogue: 0,0:04:04.68,0:04:07.58,Default,,0000,0000,0000,,See what happens --\Nso test out different things.
Dialogue: 0,0:04:08.50,0:04:12.96,Default,,0000,0000,0000,,Next, a tax creates\Nrevenues for the government --
Dialogue: 0,0:04:12.96,0:04:15.84,Default,,0000,0000,0000,,a subsidy creates\Ncosts to the government.
Dialogue: 0,0:04:15.84,0:04:17.33,Default,,0000,0000,0000,,What is the cost?
Dialogue: 0,0:04:17.33,0:04:22.03,Default,,0000,0000,0000,,Well, notice that\Nthe per unit subsidy is $1 --
Dialogue: 0,0:04:22.03,0:04:24.55,Default,,0000,0000,0000,,that's given\Nby the height of the wedge.
Dialogue: 0,0:04:25.21,0:04:27.28,Default,,0000,0000,0000,,What's the quantity\Nwhich is subsidized?
Dialogue: 0,0:04:27.28,0:04:29.18,Default,,0000,0000,0000,,Well, it's this quantity right here.
Dialogue: 0,0:04:29.18,0:04:31.86,Default,,0000,0000,0000,,So the total cost\Nof the subsidy
Dialogue: 0,0:04:31.86,0:04:34.78,Default,,0000,0000,0000,,is $1 times the quantity,
Dialogue: 0,0:04:34.78,0:04:38.07,Default,,0000,0000,0000,,or the subsidy amount\Ntimes the quantity,
Dialogue: 0,0:04:38.07,0:04:41.56,Default,,0000,0000,0000,,so it's given by\Nthis blue area right here.
Dialogue: 0,0:04:42.71,0:04:44.85,Default,,0000,0000,0000,,Finally -- got a lot to cover,
Dialogue: 0,0:04:44.85,0:04:47.65,Default,,0000,0000,0000,,but it should all be\Nfairly standard now --
Dialogue: 0,0:04:47.65,0:04:51.35,Default,,0000,0000,0000,,notice that what the subsidy does,\Nanother effect of the subsidy,
Dialogue: 0,0:04:51.35,0:04:52.52,Default,,0000,0000,0000,,not surprisingly,
Dialogue: 0,0:04:52.52,0:04:54.98,Default,,0000,0000,0000,,is that it increases\Nthe quantity exchanged.
Dialogue: 0,0:04:54.98,0:04:57.53,Default,,0000,0000,0000,,So it increases it from quantity --\Nno subsidy --
Dialogue: 0,0:04:57.53,0:04:59.92,Default,,0000,0000,0000,,to the quantity with the subsidy.
Dialogue: 0,0:05:00.33,0:05:03.95,Default,,0000,0000,0000,,Now, on these additional units exchanged,
Dialogue: 0,0:05:03.95,0:05:07.21,Default,,0000,0000,0000,,notice what the supply\Nand demand curve tells us.
Dialogue: 0,0:05:07.21,0:05:09.99,Default,,0000,0000,0000,,It tells us that\Non those additional units,
Dialogue: 0,0:05:09.99,0:05:14.62,Default,,0000,0000,0000,,the cost to the suppliers\Nof supplying those units
Dialogue: 0,0:05:14.62,0:05:19.17,Default,,0000,0000,0000,,exceeds the value\Nto the demanders of those units.
Dialogue: 0,0:05:19.44,0:05:24.34,Default,,0000,0000,0000,,So, this additional quantity\Nis creating a waste.
Dialogue: 0,0:05:24.69,0:05:28.41,Default,,0000,0000,0000,,The cost to the suppliers\Nexceeds the value
Dialogue: 0,0:05:28.41,0:05:30.57,Default,,0000,0000,0000,,of those units to the demanders.
Dialogue: 0,0:05:30.57,0:05:34.06,Default,,0000,0000,0000,,So the subsidy\Ncreates a deadweight loss.
Dialogue: 0,0:05:34.06,0:05:36.70,Default,,0000,0000,0000,,There's too much trade going on,
Dialogue: 0,0:05:36.70,0:05:38.19,Default,,0000,0000,0000,,as opposed to the tax --
Dialogue: 0,0:05:38.19,0:05:41.31,Default,,0000,0000,0000,,where the tax\Nreduces beneficial trades,
Dialogue: 0,0:05:41.31,0:05:45.54,Default,,0000,0000,0000,,the subsidy increases\Nwasteful trades.
Dialogue: 0,0:05:45.86,0:05:49.17,Default,,0000,0000,0000,,Okay, take a good look at\Nthis diagram.
Dialogue: 0,0:05:49.17,0:05:52.41,Default,,0000,0000,0000,,Make sure you understand\Neach part of the diagram,
Dialogue: 0,0:05:52.41,0:05:54.57,Default,,0000,0000,0000,,and we're going to give\Nsome applications
Dialogue: 0,0:05:54.57,0:05:57.22,Default,,0000,0000,0000,,and give a few more ways\Nof looking at this diagram.
Dialogue: 0,0:05:57.22,0:05:58.78,Default,,0000,0000,0000,,But this is really the key idea --
Dialogue: 0,0:05:58.78,0:06:01.02,Default,,0000,0000,0000,,everything in this diagram\Nright here.
Dialogue: 0,0:06:01.54,0:06:04.89,Default,,0000,0000,0000,,Do you remember our intuition\Nfor who bears the burden of a tax?
Dialogue: 0,0:06:04.89,0:06:08.26,Default,,0000,0000,0000,,It's that elasticity is like escape.
Dialogue: 0,0:06:08.26,0:06:10.53,Default,,0000,0000,0000,,So the more elastic\Nthe demand curve,
Dialogue: 0,0:06:10.53,0:06:14.30,Default,,0000,0000,0000,,the more the demanders\Nare able to escape the tax.
Dialogue: 0,0:06:14.30,0:06:17.85,Default,,0000,0000,0000,,The more elastic the supply curve\Nrelative to the demand curve,
Dialogue: 0,0:06:17.85,0:06:21.48,Default,,0000,0000,0000,,the more able the suppliers\Nare to escape the tax.
Dialogue: 0,0:06:21.48,0:06:23.63,Default,,0000,0000,0000,,Here I want to give you\Na similar intuition
Dialogue: 0,0:06:23.63,0:06:27.97,Default,,0000,0000,0000,,and way of reminding yourself\Nabout what happens with the subsidy.
Dialogue: 0,0:06:27.97,0:06:31.06,Default,,0000,0000,0000,,And that is,\Nwhen you have no elasticity
Dialogue: 0,0:06:31.06,0:06:34.58,Default,,0000,0000,0000,,or when you have\Nan inelastic curve,
Dialogue: 0,0:06:34.58,0:06:36.21,Default,,0000,0000,0000,,then there's no entry.
Dialogue: 0,0:06:36.21,0:06:39.03,Default,,0000,0000,0000,,No elasticity equals no entry.
Dialogue: 0,0:06:39.03,0:06:40.87,Default,,0000,0000,0000,,And when there's no entry,
Dialogue: 0,0:06:40.87,0:06:44.35,Default,,0000,0000,0000,,that's when you gain\Nthe benefits of the subsidy.
Dialogue: 0,0:06:44.35,0:06:48.38,Default,,0000,0000,0000,,When no one can\Ncome in to take the subsidy,
Dialogue: 0,0:06:48.38,0:06:49.99,Default,,0000,0000,0000,,you get the benefit.
Dialogue: 0,0:06:49.99,0:06:52.81,Default,,0000,0000,0000,,So when there's no elasticity,\Nno entry,
Dialogue: 0,0:06:52.81,0:06:54.99,Default,,0000,0000,0000,,you get the benefit of the subsidy.
Dialogue: 0,0:06:54.99,0:06:56.45,Default,,0000,0000,0000,,Let's take a look.
Dialogue: 0,0:06:56.45,0:06:58.41,Default,,0000,0000,0000,,Let's redo our tax analysis.
Dialogue: 0,0:06:58.41,0:07:01.46,Default,,0000,0000,0000,,So suppose we have\Na fairly elastic demand curve
Dialogue: 0,0:07:01.46,0:07:04.15,Default,,0000,0000,0000,,and a fairly inelastic supply curve,
Dialogue: 0,0:07:04.15,0:07:05.61,Default,,0000,0000,0000,,and here's our tax wedge.
Dialogue: 0,0:07:05.61,0:07:08.25,Default,,0000,0000,0000,,We drive it in the diagram\Nand what we see
Dialogue: 0,0:07:08.25,0:07:12.67,Default,,0000,0000,0000,,is that the suppliers bear\Nmore of the burden of the tax.
Dialogue: 0,0:07:12.67,0:07:15.19,Default,,0000,0000,0000,,That is, the price to them falls.
Dialogue: 0,0:07:15.19,0:07:17.47,Default,,0000,0000,0000,,They're bearing\Nthe brunt of the tax
Dialogue: 0,0:07:17.47,0:07:20.54,Default,,0000,0000,0000,,because the suppliers\Nhave nowhere else to go.
Dialogue: 0,0:07:20.54,0:07:23.96,Default,,0000,0000,0000,,They can't take their resources\Nused to produce this good
Dialogue: 0,0:07:23.96,0:07:26.88,Default,,0000,0000,0000,,and use it to produce\Nother goods in the economy.
Dialogue: 0,0:07:26.88,0:07:29.61,Default,,0000,0000,0000,,The supply is relatively fixed,
Dialogue: 0,0:07:29.61,0:07:33.97,Default,,0000,0000,0000,,the resources are most useful\Nfor producing this particular good,
Dialogue: 0,0:07:33.97,0:07:36.06,Default,,0000,0000,0000,,so the suppliers cannot escape.
Dialogue: 0,0:07:37.12,0:07:39.00,Default,,0000,0000,0000,,For the very same reasons,
Dialogue: 0,0:07:39.00,0:07:42.45,Default,,0000,0000,0000,,the suppliers will get most\Nof the gains of a subsidy.
Dialogue: 0,0:07:42.45,0:07:44.10,Default,,0000,0000,0000,,So here's our subsidy wedge --
Dialogue: 0,0:07:44.10,0:07:46.43,Default,,0000,0000,0000,,we drive it in to the diagram.
Dialogue: 0,0:07:46.43,0:07:50.04,Default,,0000,0000,0000,,We could read off the diagram here\Nthat the price to the suppliers
Dialogue: 0,0:07:50.04,0:07:55.76,Default,,0000,0000,0000,,is going to rise much more\Nthan the price to the buyer falls,
Dialogue: 0,0:07:55.76,0:07:57.52,Default,,0000,0000,0000,,relative to the market price.
Dialogue: 0,0:07:57.52,0:07:59.15,Default,,0000,0000,0000,,So what's going on?
Dialogue: 0,0:07:59.15,0:08:03.00,Default,,0000,0000,0000,,Well, what's going on\Nis that we have this subsidy,
Dialogue: 0,0:08:03.00,0:08:06.05,Default,,0000,0000,0000,,but because\Nthe supply curve is inelastic,
Dialogue: 0,0:08:06.05,0:08:08.09,Default,,0000,0000,0000,,we don't see a lot of resources
Dialogue: 0,0:08:08.09,0:08:10.81,Default,,0000,0000,0000,,coming from elsewhere\Nin the economy
Dialogue: 0,0:08:10.81,0:08:15.14,Default,,0000,0000,0000,,to grab up that subsidy,\Nto take that subsidy.
Dialogue: 0,0:08:15.14,0:08:17.80,Default,,0000,0000,0000,,The resources\Nin the rest of the economy
Dialogue: 0,0:08:17.80,0:08:20.98,Default,,0000,0000,0000,,are not good\Nat producing this type of good,
Dialogue: 0,0:08:20.98,0:08:25.10,Default,,0000,0000,0000,,so it's only the resources\Nwhich are already in this market,
Dialogue: 0,0:08:25.10,0:08:26.65,Default,,0000,0000,0000,,the fixed resources --
Dialogue: 0,0:08:26.65,0:08:29.78,Default,,0000,0000,0000,,they're the ones which\Nare going to grab up the subsidy.
Dialogue: 0,0:08:29.78,0:08:31.45,Default,,0000,0000,0000,,The price is going to go up
Dialogue: 0,0:08:31.45,0:08:33.96,Default,,0000,0000,0000,,because we don't\Nhave a lot of resources
Dialogue: 0,0:08:33.96,0:08:37.12,Default,,0000,0000,0000,,coming from other areas\Nof the economy to produce this good.
Dialogue: 0,0:08:38.39,0:08:40.53,Default,,0000,0000,0000,,Or we can think about this\Nfrom the point of view
Dialogue: 0,0:08:40.53,0:08:41.86,Default,,0000,0000,0000,,of the demanders.
Dialogue: 0,0:08:42.12,0:08:45.07,Default,,0000,0000,0000,,When the demand\Nis relatively elastic,
Dialogue: 0,0:08:45.07,0:08:46.91,Default,,0000,0000,0000,,they can escape the tax.
Dialogue: 0,0:08:46.91,0:08:50.54,Default,,0000,0000,0000,,But, similarly,\Nwhen the demand is elastic,
Dialogue: 0,0:08:50.54,0:08:53.41,Default,,0000,0000,0000,,the demanders from other parts\Nof the economy
Dialogue: 0,0:08:53.41,0:08:54.85,Default,,0000,0000,0000,,with the substitute goods,
Dialogue: 0,0:08:54.85,0:08:57.23,Default,,0000,0000,0000,,they're going to come in\Nand grab up that subsidy.
Dialogue: 0,0:08:57.23,0:08:59.15,Default,,0000,0000,0000,,They're going to keep the price high
Dialogue: 0,0:08:59.15,0:09:03.90,Default,,0000,0000,0000,,because demanders are going to\Nstop consuming the substitute good,
Dialogue: 0,0:09:03.91,0:09:06.25,Default,,0000,0000,0000,,and they're instead\Ngoing to move into this market
Dialogue: 0,0:09:06.25,0:09:07.95,Default,,0000,0000,0000,,to consume this good.
Dialogue: 0,0:09:07.95,0:09:11.62,Default,,0000,0000,0000,,And because you get\Nall of these demanders
Dialogue: 0,0:09:11.62,0:09:14.61,Default,,0000,0000,0000,,from elsewhere in the economy\Ncoming in to buy this good,
Dialogue: 0,0:09:14.61,0:09:16.99,Default,,0000,0000,0000,,the price doesn't fall very much.
Dialogue: 0,0:09:17.42,0:09:21.32,Default,,0000,0000,0000,,Okay, once again,\Nplay around with this.
Dialogue: 0,0:09:21.56,0:09:23.54,Default,,0000,0000,0000,,Draw some demand and supply curves,
Dialogue: 0,0:09:23.54,0:09:26.35,Default,,0000,0000,0000,,put in a tax wedge,\Nput in a subsidy wedge
Dialogue: 0,0:09:26.35,0:09:28.60,Default,,0000,0000,0000,,until this all becomes intuitive.
Dialogue: 0,0:09:28.60,0:09:30.90,Default,,0000,0000,0000,,And remember that,\Nin the case of subsidies,
Dialogue: 0,0:09:30.90,0:09:34.95,Default,,0000,0000,0000,,no elastic or less elastic\Nmeans less entry,
Dialogue: 0,0:09:34.95,0:09:39.73,Default,,0000,0000,0000,,less entry means\Nmore gains to the subsidy --
Dialogue: 0,0:09:39.73,0:09:41.94,Default,,0000,0000,0000,,they get more\Nof the benefits of the subsidy.
Dialogue: 0,0:09:41.94,0:09:43.55,Default,,0000,0000,0000,,Let's do an application.
Dialogue: 0,0:09:43.75,0:09:46.25,Default,,0000,0000,0000,,Farmers in\NCalifornia’s Central Valley
Dialogue: 0,0:09:46.25,0:09:48.22,Default,,0000,0000,0000,,get a big water subsidy.
Dialogue: 0,0:09:48.22,0:09:51.54,Default,,0000,0000,0000,,They typically pay $20\Nto $30 an acre-foot for water
Dialogue: 0,0:09:51.54,0:09:55.81,Default,,0000,0000,0000,,that costs $200 to $500\Nan acre-foot to produce.
Dialogue: 0,0:09:55.81,0:09:58.45,Default,,0000,0000,0000,,So who benefits\Nthe most from this subsidy?
Dialogue: 0,0:09:58.45,0:10:00.86,Default,,0000,0000,0000,,Is it the California\Ncotton suppliers,
Dialogue: 0,0:10:00.86,0:10:03.71,Default,,0000,0000,0000,,or is it the buyers\Nof California cotton?
Dialogue: 0,0:10:04.03,0:10:05.93,Default,,0000,0000,0000,,Let's think about it this way.
Dialogue: 0,0:10:06.13,0:10:08.43,Default,,0000,0000,0000,,The buyers of California cotton --
Dialogue: 0,0:10:08.43,0:10:10.30,Default,,0000,0000,0000,,what kind of substitutes\Ndo they have?
Dialogue: 0,0:10:11.03,0:10:12.99,Default,,0000,0000,0000,,Are they going to have\Nan elastic demand
Dialogue: 0,0:10:12.99,0:10:14.87,Default,,0000,0000,0000,,or an inelastic demand?
Dialogue: 0,0:10:15.60,0:10:17.55,Default,,0000,0000,0000,,The buyers of California cotton
Dialogue: 0,0:10:17.55,0:10:20.48,Default,,0000,0000,0000,,are going to have\Na very elastic demand, right?
Dialogue: 0,0:10:20.48,0:10:23.55,Default,,0000,0000,0000,,Because they can substitute\Ncotton grown in Georgia,
Dialogue: 0,0:10:23.55,0:10:26.57,Default,,0000,0000,0000,,they can substitute\Ncotton grown in Pakistan,
Dialogue: 0,0:10:26.57,0:10:29.50,Default,,0000,0000,0000,,in India, in many\Nother places in the world.
Dialogue: 0,0:10:29.50,0:10:33.17,Default,,0000,0000,0000,,In fact, the price of cotton\Nis basically set in a world market,
Dialogue: 0,0:10:33.17,0:10:37.79,Default,,0000,0000,0000,,so if we have a subsidy\Nfor California-cotton suppliers,
Dialogue: 0,0:10:37.79,0:10:40.93,Default,,0000,0000,0000,,that's not going to push the world\Nprice down very much at all.
Dialogue: 0,0:10:40.93,0:10:43.60,Default,,0000,0000,0000,,It's simply going\Nto induce some buyers
Dialogue: 0,0:10:43.60,0:10:46.14,Default,,0000,0000,0000,,to buy more California cotton
Dialogue: 0,0:10:46.14,0:10:50.91,Default,,0000,0000,0000,,and a little bit less of cotton\Nfrom Pakistan or from India.
Dialogue: 0,0:10:51.20,0:10:54.14,Default,,0000,0000,0000,,On the other hand,\Nthe California cotton suppliers --
Dialogue: 0,0:10:54.14,0:10:56.65,Default,,0000,0000,0000,,they've got a pretty\Ninelastic supply curve.
Dialogue: 0,0:10:56.65,0:10:59.17,Default,,0000,0000,0000,,There's not that much\Nland there to begin with,
Dialogue: 0,0:10:59.17,0:11:02.75,Default,,0000,0000,0000,,and it's really pretty fixed\Nfor growing agricultural goods,
Dialogue: 0,0:11:02.75,0:11:05.87,Default,,0000,0000,0000,,and probably fairly fixed\Nfor growing cotton.
Dialogue: 0,0:11:06.08,0:11:08.83,Default,,0000,0000,0000,,So, the California cotton suppliers
Dialogue: 0,0:11:08.83,0:11:11.58,Default,,0000,0000,0000,,are going to get\Nmost of the benefits
Dialogue: 0,0:11:11.58,0:11:13.08,Default,,0000,0000,0000,,of this subsidy.
Dialogue: 0,0:11:13.49,0:11:16.99,Default,,0000,0000,0000,,It's not going to lower\Nthe price of pants at the Gap.
Dialogue: 0,0:11:16.99,0:11:19.82,Default,,0000,0000,0000,,Instead it's going\Nto go into the pockets
Dialogue: 0,0:11:19.82,0:11:22.91,Default,,0000,0000,0000,,of the California cotton suppliers,\Nof the farmers.
Dialogue: 0,0:11:23.04,0:11:26.50,Default,,0000,0000,0000,,Not surprisingly,\Nit's the farmers in California
Dialogue: 0,0:11:26.50,0:11:30.05,Default,,0000,0000,0000,,who lobby extensively\Nfor this subsidy,
Dialogue: 0,0:11:30.05,0:11:32.45,Default,,0000,0000,0000,,and it's not\Nthe consumers of cotton.
Dialogue: 0,0:11:32.45,0:11:33.64,Default,,0000,0000,0000,,So as we've just shown,
Dialogue: 0,0:11:33.64,0:11:35.74,Default,,0000,0000,0000,,subsidies can often be wasteful.
Dialogue: 0,0:11:35.74,0:11:38.69,Default,,0000,0000,0000,,And one of the reasons that\Nwe have subsidies is politics --
Dialogue: 0,0:11:38.69,0:11:41.12,Default,,0000,0000,0000,,the power of Special\NInterest Groups in lobbying
Dialogue: 0,0:11:41.12,0:11:41.98,Default,,0000,0000,0000,,and so forth.
Dialogue: 0,0:11:41.98,0:11:44.21,Default,,0000,0000,0000,,We'll talk more\Nabout that another time.
Dialogue: 0,0:11:44.21,0:11:46.79,Default,,0000,0000,0000,,However,\Nsubsidies can also be useful,
Dialogue: 0,0:11:46.79,0:11:52.02,Default,,0000,0000,0000,,particularly if there's a reason\Nwhy the demand for a good
Dialogue: 0,0:11:52.02,0:11:54.86,Default,,0000,0000,0000,,understates\Nthe true value of that good.
Dialogue: 0,0:11:55.68,0:11:58.01,Default,,0000,0000,0000,,We'll give lots of examples\Nof this type of thing
Dialogue: 0,0:11:58.01,0:12:00.54,Default,,0000,0000,0000,,when we come\Nto talk about externalities,
Dialogue: 0,0:12:00.54,0:12:04.01,Default,,0000,0000,0000,,but before we do that I want\Nto give you one more example,
Dialogue: 0,0:12:04.01,0:12:05.99,Default,,0000,0000,0000,,where this should be\Nfairly intuitive
Dialogue: 0,0:12:05.99,0:12:07.69,Default,,0000,0000,0000,,and that's wage subsidies.
Dialogue: 0,0:12:08.01,0:12:09.39,Default,,0000,0000,0000,,So the next lecture,
Dialogue: 0,0:12:09.39,0:12:11.30,Default,,0000,0000,0000,,we'll look at wage subsidies
Dialogue: 0,0:12:11.30,0:12:14.21,Default,,0000,0000,0000,,for unskilled\Nor lower-skilled workers
Dialogue: 0,0:12:14.21,0:12:16.30,Default,,0000,0000,0000,,and we'll compare that\Nwith the minimum wage.
Dialogue: 0,0:12:16.30,0:12:17.14,Default,,0000,0000,0000,,Thanks.
Dialogue: 0,0:12:18.76,0:12:20.41,Default,,0000,0000,0000,,- [Narrator]\NIf you want to test yourself,
Dialogue: 0,0:12:20.41,0:12:22.46,Default,,0000,0000,0000,,click “Practice Questions.”
Dialogue: 0,0:12:22.74,0:12:26.02,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click “Next Video.”
Dialogue: 0,0:12:26.48,0:12:28.93,Default,,0000,0000,0000,,♪ [music] ♪