The U.S. government offers significant per unit subsidy payments to U.S. sugar g

Question

The U.S. government offers significant per unit subsidy payments to U.S. sugar growers. Describe the effects of the introduction of such subsidies on the market for sugar and themarket for artificial sweeteners.

i) Explain whether the demand curve (D) or the supply curve (S) shifts in each market, market for sugar and market for artificial sweetener, and if so, in which direction.

ii) Also explain what happens to the equilibrium quantity (Q) and the market price (P)in each market (for Sugar and for Artificial Sweeteners).

Explanation / Answer

(1)

The logic behind providing subsidy for an activity is to encourage that activity. Since, the government is providing significant per unit subsidy payments to US sugar growers, it will lead to more people getting into the sugar growing business. This will lead to increasing supply of sugar and will shift the supply curve for sugar towards the right. This increase in supply will automatically lead to a fall in sugar price leading to a temporary rise in sugar demand. On the other hand, Since artificial sweetners are substitutes for sugar, increase in supply of sugar will lead to a fall in the demand of artificial sweetners and cause its demand curve to shift towards left. Also, since subsidies have made sugar growing more lucrative, it may also cause producers of artificial sweetners to switch to growing sugar which will cause the supply curve for artificial sweetners to move left.

(2)

Increase in supply of sugar will lead to fall in equilibrium price (P) and rise in the equilibrium quantity (Q). Decrease in supply of artificial sweetners will lead to a decrease in equilibrium quantity (Q) and rise in equilibrium price (P) for artificial sweetners.

NOTE: The change in behaviour of the two markets will be driven by changes in supply side. Demand side will simply respond to these supply changes.

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