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ECON305: Public Finance

Unit 3: Subsidies   Subsidies are expenditures by the government intended to support an activity that politicians or government bureaucrats think society needs more of.  Subsidies are the opposite of taxes; rather than altering individual behavior by making one activity less profitable than another, they make one activity more profitable than another.  Much of the logic that applies to taxes also applies to subsidies—only in reverse.  Generally subsidies are justified on one of three arguments: (i) redistribution of wealth, (ii) national interest, and (iii) to promote positive externalities.  The first justification is a matter of national values, which each country decides on the basis of their beliefs.  Economists can help in this case by considering the economic costs and benefits of this decision.  The second justification is one that is liable to abuse by special interests, and one that does not warrant extended discussion.  The third justification, however, is interesting from an economic point of view, this justification will be considered in the first section of this unit.  We will then move onto considering some empirical evidence of the success that various kinds of subsidies have.  As we move into Unit 4, it will be helpful to remember that both the success and failure of policies can cause an increase in the demand for government expenditure  Do you think that farmers who have been helped by the government will want more or less support in the future?

3.1 Types of and Justifications for Subsidies   3.1.1 Types of Subsidies   - Reading: Wikipedia’s “Subsidy” Link: Wikipedia’s “Subsidy” (PDF)

 Instructions: Please read the entire text, paying particular
attention to the section titled “Types of Subsidies.”  
    
 Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Subsidy).

3.1.2 Subsidies in the Case of Positive Externalities (Merit Goods)   - Lecture: Tutor2u’s “Merit Goods” Link: Tutor2u’s “Merit Goods” (Adobe Flash)
 
Instructions: Please review the whole presentation, focusing particularly on the section entitled “Encouraging Consumption of Merit Goods.”
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

3.2 Effects of Subsidies: Deadweight Losses   - Lecture: Tutor2u’s “Producer Subsidies” Link: Tutor2u’s “Producer Subsidies” (Adobe Flash)
 
Instructions: Please review the entire presentation.
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

3.3 Subsidies as Public Policy   3.3.1 Farm Subsidies   - Lecture: Robert LeFevre’s “Farm Subsidies and the First Secretary of Agriculture” Link: Robert LeFevre’s “Farm Subsidies and the First Secretary of Agriculture” (Youtube)

 Instructions: Please listen to the entire recording of the lecture
(28:36).  
    
 Terms of Use: The video above is licensed under a [Creative Commons
Attribution 3.0 United States
License](http://creativecommons.org/licenses/by/3.0/us/).  It is
attributed to the [Ludwig von Mises Institute](http://mises.org/).

3.3.2 Public Education   - Reading: Tutor2u’s “AS Market Failure: Merit Goods” Link: Tutor2u’s “AS Market Failure: Merit Goods” (Adobe Flash)
 
Instructions: Read the entire text, paying particular attention to the section on public education and the section describing the welfare gain to the additional provision of the subsidized goods.
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

3.3.3 Unemployment Insurance and Welfare   - Reading: Mary B. Larner et al’s “Welfare to Work: Analysis and Recommendations” and The Saylor Foundation’s handout on "Unemployment Benefits and Labor-Leisure Tradeoff.” Link: Mary B. Larner et al’s “Welfare to Work: Analysis and Recommendations” (PDF) and The Saylor Foundation’s handout on “Unemployment Benefits and Labor-Leisure Tradeoff” (PDF)

 Instructions: Please read both of these texts.    

 Terms of Use: The Larner article is published by The Future of
Children under a [Creative Commons Attribution-NoDerivs 3.0 Unported
License](http://creativecommons.org/licenses/by-nd/3.0/).  You can
find the original version of the article
[here](http://www.princeton.edu/futureofchildren/publications/journals/article/index.xml?journalid=54&articleid=296&sectionid=1954).