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"...that's right, in Singapore they impose a 'GENERAL SALES TAX (GST) of '8%' on each sale, which is a type of 'INDIRECT CONSUMPTION TAX' that you only pay when you purchase something." "Do you know why it's called 'indirect'?" and "Is 8% considered high or low?"

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SUGARY DRINK PRODUCERS HAVE NO INCENTIVE TO REFORMULATE TO LOWER SUGAR CONTENT AND AVOID THE TAX as the tax is imposed on UNITS PRODUCED rather than on SUGAR CONTENT.

'Tax per unit' vs 'Tax per measure'

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--TASK--

"Now indicate the following..."

1) "The subsidy paid by the government per unit."

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That's right, it's the vertical gap between the two prices."

--DEFINITION--

"DIRECT PROVISION occurs when the government itself 'arranges' for the provision of the goods or services to the consumers, rather than relying entirely on private-sector provision through the market mechanism."

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"But why?"

--TASK--

Ask yourself the following questions:

"Who owns, funds and operates government schools in Hong Kong?"

"Who owns and operates KMB and Citybus, and what role does the government play?"

"Who funds and operates DSS schools in Hong Kong, and why can they charge fees?"

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3. How does direct provision affect the market?

For a merit good such as education, students should be able to explain the following sequence:

Private market provision may result in underconsumption

Government directly provides education, possibly free at the point of use

The financial barrier to access is reduced

Consumption and access may increase

Potential improvements in resource allocation and equity

Students should recognise that additional provision requires scarce resources, such as teachers, buildings, equipment and government expenditure.

4. Advantages and disadvantages

Advantages Disadvantages

Can increase consumption of underprovided merit goods High government expenditure and opportunity cost

Can ensure public goods are provided Risk of government inefficiency and waste

Improves access for lower-income households Excess demand, waiting lists and rationing

May generate wider social benefits Provision may not match consumer preferences

Can reduce inequalities in access Government may misjudge how much to provide

For evaluation, students should go beyond simply listing advantages and disadvantages.

For example, providing free healthcare may improve access for poorer households. However, if government funding is insufficient, waiting times may increase and the quality of care may deteriorate. Therefore, the effectiveness of direct provision depends partly on funding, productive efficiency and the ability to meet demand.

"We saw in the previous unit the REASONS why maximum and minimum prices were used to fix prices below or above the equilibrium price; let's now look at the EFFECTIVENESS/CONSEQUENCES."

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"Let's start with a PRICE CEILING."

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"That's right, the imposition of a price ceiling causes the market price to fall below the equilibrium price, which leads to a contraction in the quantity supplied and an extension in the quantity demanded, resulting in a SHORTAGE and a fall in producer revenue."

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"That's right.' By 'first-come-first-serve', by 'strength', by 'luck', by 'favouritism', and by 'meeting a qualification criteria'. And the most obvious omission is by 'the price mechanism'.

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"Clearly, if the price mechanism can no longer achieve its rationing function, and a shortage occurs, the government must attempt to decide the most equitable answer to HOW WILL THE INSUFFICIENT QUANTITY SUPPLIED BE DISTRIBUTED?

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"With high demand, yet relatively fixed prices, how do you think scarce elite university places are rationed?"

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"Ask yourself, is it possible for you to purchase a child's MRT card and use it in HK without anyone knowing?" "What about a cinema ticket?" "Is there any way to stop people with higher incomes taking advantage of 'educators/student' prices?"

Referring back to UNIT 2.5 CONSUMER & PRODUCER SURPLUS, we know that any quantity below the free-market equilibrium is considered inefficient, and in the case of a price ceiling there will be an  UNDERALLOCATION OF RESOURCES & ALLOCATIVE INEFFICIENCY."

"Now let's look at the EFFECTIVENESS and CONSEQUENCES of a PRICE FLOORS."

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"That's right, the imposition of a price floor causes the market price to rise above the equilibrium price, which leads to an extension in the quantity supplied and an contraction in the quantity demanded, resulting in a SURPLUS and an uncertain change in producer revenue (See below the impact of PED)."

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"In the case of strategically important industries like agriculture, which impact food security and independence, why would the government create underprovision?

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"They don't, as the government actually becomes the consumer and purchases any surplus for themselves, thus guaranteeing the higher income for farmers."

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"Look at the diagram below to see how the government intervenes to guarantee farmers' incomes."

"Clearly, with any surplus, there will ALWAYS BE SELLERS WILLING TO ACCEPT LESS and BUYERS EQUALLY WILLING TO PAY LESS; hence, this encourages ILLEGAL UNDERGROUND (or PARALLEL) MARKETS to appear."

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--TASK--

"Fill in the speech bubbles of the following two situations to illustrate how price floors lead to illegal activities."

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⚠️DIFFICULT but IMPORTANT⚠️

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We know that the imposition of the minimum price means, society loses the potential gains from these transactions from Qd to Qe. Now when the government purchases all surplus (Qs = 65), the consumer still only purchases Qd, while the government purchases are assumed to remain unused. This means the lost consumption benefits associated with units Qd to Qe have not been restored. The government has paid farmers for additional production, but these payments are transfers, not new consumption benefits. Resources are now used to produce 30 units that provide no additional benefit under our assumptions.

The crucial point when the government purchases goods between Qd and Qe, the original DWL triangle does not disappear simply because farmers receive payment.

However, we must avoid double-counting production costs.

The original DWL between Qd and Qe represents lost net gains from private trade, not simply goods that are no longer produced.

When the government buys those goods, production costs are incurred, but consumption benefits are still lost. Accounting for the original DWL plus the extra costs of producing government-held output correctly captures both effects.

For your example:

Welfare effect Value

Lost net gains from private consumption (Qd to Qe) 225

Extra resource costs of government-purchased output (Qd to Qs) 1,500

Overall welfare loss 1,725

These costs refer to different welfare components, even where the quantity ranges overlap.

The essential distinction: The government can restore sales and producer revenue without restoring consumption benefits or economic efficiency.

If the government distributes the purchased food to people who value it, the analysis changes because those goods now generate additional social benefits.

"Assuming the goods purchased by the government are not consumed and therefore generate NO ADDITIONAL SOCIAL BENEFITS, the only gain in CS + PS from government purchases (compared with a minimum price WITHOUT government purchases) is the EXTRA PRODUCER SURPLUS (PS) received by farmers."

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"However, to generate this gain, the government must incur EXPENDITURE, financed through taxation, borrowing or cuts in other public spending. This expenditure has an OPPORTUNITY COST because the funds could have been used elsewhere."

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"Therefore, the ADDITIONAL DEADWEIGHT WELFARE LOSS (DWL) created by government purchases equals GOVERNMENT EXPENDITURE MINUS THE EXTRA PRODUCER SURPLUS. This represents the real resource cost of producing government-purchased goods that generate no additional social benefits."

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"The OVERALL DWL from the price-floor intervention is even greater because it also includes the lost gains from trade caused by UNDERCONSUMPTION."

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Therefore, a minimum price supported by government purchases can lead to BOTH UNDERCONSUMPTION by private consumers and OVERPRODUCTION relative to the free-market equilibrium, creating ALLOCATIVE INEFFICIENCY and additional GOVERNMENT EXPENDITURE."

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--TASK--

"We just said the extra spending creates no additional benefits to society; can you think of how the government could try to gain some benefits?"

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BIG TASK--

"Use the stakeholder diagram above and one of the real-world examples below to "Evaluate the use of price floors in the market for __________."

MINIMUM WAGE (UK)

MINIMUM UNIT PRICING FOR ALCOHOL (SCOTLAND, WALES)

RICE / WHEAT SUPPORT PRICES (INDIA)

AGRICULTURAL PRICE SUPPORT (EU)

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"A BUFFER STOCK SCHEME is a form of government intervention designed to stabilise the market price of a commodity within a fixed range by purchasing and storing surplus output when prices are too low and releasing previously stored output when prices are too high."

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"Why does the government care about commodities?"

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"Agricultural commodities are often particularly important to national economies because they provide essential food and raw material supplies, support a large number of rural jobs and generate incomes for farming communities."

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"Governments may therefore introduce buffer stock schemes to stabilise agricultural prices, protect rural employment and incomes, maintain food affordability and strengthen national food security."

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--IF THE MARKET PRICE FALLS BELOW THE MINIMUM PRICE...--

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--TASK--

"Sketch and explain the following scenario."

--IF THE MARKET PRICE RISES ABOVE THE MAXIMUM PRICE...--

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--TASK--

"Sketch and explain the following scenario."

""Clearly, buffer stock schemes create GREATER PRICE STABILITY, which in turn generates a series of interconnected benefits."

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1. GREATER INCOME STABILITY FOR PRODUCERS

"By preventing agricultural prices from falling too sharply, buffer stock schemes help stabilise farmers' revenues and incomes, reducing the risk of sudden financial losses..."

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2. GREATER CERTAINTY AND INVESTMENT

"...with more predictable incomes, farmers face less uncertainty about their future earnings. Consequently, they may be more willing and able to invest in machinery, irrigation systems and improved production techniques, increasing agricultural productivity and productive capacity."

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3. GREATER AGRICULTURAL PRODUCTION + SUPPLY SECURITY

"As investment improves agricultural productivity and productive capacity, farmers may be able to produce more efficiently and maintain a more reliable supply of essential commodities, reducing the risk of future shortages."

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4. GREATER AFFORDABILITY FOR CONSUMERS

"Furthermore, when poor harvests or supply disruptions cause shortages, the government can release previously stored commodities onto the market, limiting sharp price increases. Consequently, essential food products may remain more affordable for consumers."

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5. IMPROVED FOOD SECURITY AND LIVING STANDARDS

"With a more reliable supply of agricultural commodities and fewer extreme price increases, households are better able to access and afford essential food products. Therefore, buffer stock schemes may improve national food security and protect consumers' living standards."

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OVERALL CONCLUSION

"Therefore, by stabilising agricultural prices, buffer stock schemes can protect farmers' incomes, encourage long-term investment, support agricultural production and improve the affordability and availability of essential food products."

HIGH GOVERNMENT EXPENDITURE

"The government may need to purchase large quantities of surplus commodities during periods of excess supply. These purchases can be expensive. Therefore, maintaining the scheme may create a substantial financial burden and opportunity cost."

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STORAGE AND ADMINISTRATION COSTS

"Purchased commodities must be transported, inspected, protected and stored. Warehouses, refrigeration and stock management may involve significant costs. Therefore, the total cost of operating the scheme may be much greater than the initial purchasing expenditure."

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PERISHABILITY AND DETERIORATION

"Some agricultural commodities deteriorate over time. If stored commodities become unsuitable for consumption, the government may be unable to sell them. Therefore, buffer stock schemes are more practical for commodities that can be stored for long periods, such as certain grains."

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BUFFER STOCKS MAY BE EXHAUSTED

"A succession of poor harvests may require the government to release stocks repeatedly. Eventually, the government may run out of stored commodities. Therefore, it may become impossible to maintain the maximum price."

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EXCESSIVE STOCK ACCUMULATION

"A succession of bumper harvests may force the government to purchase increasingly large quantities of output. Stocks may accumulate faster than they can be sold. Therefore, storage requirements and government expenditure may become financially unsustainable."

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DISTORTED PRODUCER INCENTIVES

"If the minimum price is maintained at an artificially high level, producers may be encouraged to produce more than private consumers are willing to purchase. Therefore, the scheme may encourage persistent overproduction and increase the need for government purchases."

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--TASK--

"Use your chosen example above to create the relevant diagram to show the impact of the intervention."

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4. Advantages of providing information

- Improves consumers' ability to make informed decisions.

- Can correct information-related underconsumption and overconsumption.

- Preserves consumer choice rather than banning products.

- May reduce the need for more restrictive government intervention.

5. Disadvantages and limitations

- Consumers may ignore information or fail to change their behaviour.

- Habits and addiction may limit effectiveness.

- Information campaigns involve government expenditure and opportunity costs.

- Behavioural changes may take considerable time.

- Information alone cannot eliminate external costs or benefits.