- Elgar original reference
Edited by William A. Kerr and James D. Gaisford
27 Production subsidies Karl D. Meilke and John Cranﬁeld Introduction Production subsidies are one of the most common forms of government intervention in the economy. Most countries provide ﬁnancial support and protection for a wide range of economic activities that serve to increase the output of these industries above what would be supplied at world market prices. Examples include industries as diverse as culture (symphonies, authors, artists), agriculture and aerospace. In turn, the economic instruments used to provide production incentives are as diverse as a politician’s imagination. However, the primary instruments all fall into one of four categories: ● ● ● ● Market price supports that keep both producer and consumer prices above world price levels. Market price supports provide an incentive for producers to supply more and consumers to consume less than they would at world prices. These ‘distortions’ in production and consumption lead to a loss in economic welfare (Houck 1986; Just et al. 1982). Market price supports are common in the agricultural sectors of many developed countries and have traditionally played an important role in the regulated prices charged by taxis, cable TV and local phone service. Deﬁciency payments to producers can be used to bridge the gap between a regulated ﬂoor price and lower world market prices. Deﬁciency payments distort domestic production decisions but consumers are allowed to purchase the product at world prices. Deﬁciency payment schemes or ‘stabilization policies’ abound in agriculture (OECD 2003). Input subsidies are often provided to ﬁrms to allow them to...
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