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The Impact of Consumer Subsidies - Part 1

Ans A: Perfect elasticity refers to the situation where demand or supply will change infinitely with change in price. Here the demand curve

Presently equilibrium price is $4000, and quantity is 20,000.

Ans B : Subsidy is an incentive given by the government to boost a particular industry and provide an incentive which becomes temptative to the concerned party who is the consumer of the product.

So in the given case if government subsidy is given then definitely people will start using the product and it will be easier to penetrate the market faster and solar panel power generation is the future of the industry as all the major economies has invested in the same and current techniques of power generation is costly as regards to Price and Pollution also. Which will be mitigated if the solar Panels are used.

From bringing awareness and making people attracted towards solar energy many countries had come with subsidies and that had increased the demand.

(Source-Demanding Innovation: The Impact of Consumer Subsidies on Solar Panel Production Costs By Todd Gerarden, 2018)

 As per the author, the countries that had offered subsidies had increased in demand of solar panels by around 50% over the equilibrium quantity. Adopting the same ratio we can have following estimates.

Consumer Surplus: Present Equilibrium quantity, = 20,000

Add- increase@50% = 10,000

Total demand = 30,000

Producer Surplus: Increasing demand will help to achieve technical efficiency and that will ultimately reduce the overall cost of production to the producer. Further the governments are also offering grants to the investors and that will allow new players to enter the market. The technical efficiency increase will also increase market share of the companies both are having direct relationships.

Government Tax Receipts: In one of the postings of Tim Sylvia,(2017), the USA government reported a 2000% increase in tax revenue from solar projects. Whereas only 50 countries reported less than 1000% increased tax revenue. Accordingly once the plan is established, the government received an unbelievable increase in revenue.

Total Surplus,

Increase in installation by 10,000 will increase the revenue as follows.

(i) to the manufacturer

Particulars

20000 installation

30000 installation

Sales Revenue

$4000

$5880 (assuming 2% decrease)

Less - Manufacturing cost

$3000(approx)

$4400

Net revenue

$1000

$1880

Per installation revenue

$0.05

$0.06

(ii) to the customer

Particulars

20000 installation

30000 installation

Investment

$4000

$5880 (assuming 2% decrease)

Less - Subsidy @30%

$1200

$1764

Net outflow

$2800

$4116

Deadweight Loss relative to the free-trade equilibrium

Deadweight loss will be generated if the government fails to achieve equilibrium point.

Suppose government could get the order of only 15000 installation, and the price for the same is $3000, deadweight loss will be as follow,

Deadweight loss = (actual price - equilibrium price)* (equilibrium quantity-actual quantity)*½

= ($3000-$4000)*(20000-15000)*½

=$250,000

However if quantity upto equilibrium is installed, no loss will be there.

Ans C : Price floor is the minimum price at which goods are to be sold. If the Floor Price is above cost then it is beneficial to the manufacturer and a long run survival of industry is possible. When the floor price is decided by the government on the product then the said product is sold at the certain minimum. So by determining the floor price solar panel will be sold at a particular price where the minimum price is fixed but it can be sold at above floor price also.

To establish the price floor policy, the minimum price should be higher than the equilibrium price which is $4000 in present case. Accordingly by adopting price floor government may increase the price which will distract investors and will not work to achieve the target installation of 30000 every year.

Further increasing demand and production will provide technical efficiency which will help in price reduction .

Accordingly price flooring methodology is not appropriate to be adopted.

Ans D : Price Ceiling is the maximum price above which goods cannot be sold. Ceiling Price should be able to absorb the cost plus certain percentage of contribution then it is beneficial to the manufacturer and a long run survival of industry is possible. When the Ceiling price is decided by the government on the product then the said product is sold at the certain maximum level. So by determining the Ceiling price solar panel will be sold at a particular price where the maximum price is fixed but it can be sold at Below Ceiling price also.

Based on the diagram we can have an idea that the price ceiling is the price which will be less than equilibrium price.

Presently the suppliers of main raw materials are very limited. USA is the leading supplier as of now. Further day by day many investors are entering the market. Demand for solar panels is expected to grow around 4% for next 20-30 years. Every day increase in solar panels manufacturing may increase the cost of material in near future.

Accordingly, the price ceiling will be harmful to the manufacturer not not recommendable at present.

Ans E: Perfectly Inelastic is the situation at any price demand of the product is constant.

Thus there are many threats to the business,like high price for power quality, moving towards other substitutes, wrongful utilisation of government benefits etc.

To establish control on the market and provide customer satisfaction, if demand is perfectly inelastic then Price Ceiling will be the best option by deciding the maximum price of the product which covers the cost of manufacturing including the contribution margin. This will benefit customers and suppliers as well.

The Impact of Consumer Subsidies - Part 2

Ans A: Monopoly is the situation in the market where a single player sells the products or provides the services. Where demand, supply, prices etc. are controlled by the single company. And there are no close substitutes in the market.

Factors Influencing Monopoly even in the absence of Government Intervention in telecom sectors are:

  • Ownership of key resources

The key resources for a telecommunication service company is the main reason to hit the market. These services may include following,

(a) Low Price of Services.

When A company provides services at low prices compared to their competitors. Which will attract the customers without second thought. Teltra provides quick service to customers through social channels since 2017.

(b) Network Connection at high level.

Network connectivity is the foremost requirement of any telecom providers and if that is available in the remote area, it will be accepted in the most efficient manner.

(c) Providing comprehensive services which includes Voice Calling, Data Packages, Entertainment etc.

Telecom services also provides Data Packages, entertainment application subscription,, education facility, payment banks, etc. so all in all when services are in full package form, customers are immediately tempted to avail the services.

(2) Restricted Entry

In monopoly the entries to the market are restricted. Thus, in the seller is the only dealer in the market and that is a very big factor.

(3) Elasticity of demand

Telecom service is having inelastic demand as it is the main source of communication in the present market. Inelastic demand of the monopoly market the service provider is a king as customer will purchase at any price.

(4) Product differentiation

Sometimes the monopoly competition is being attacked by new inference to the market. Or when a person is entering into an existing perfect competition market, in both these situations product differentiation can lead the company to monopoly. Like presently internet service at the cheapest rate is a kind of product differentiation. The company came with the idea of live chat, crowd support client services etc. in the very beginning of 2013.(Source- NADIA CAMERON,2014 )

Ans B: Marginal Costs of Production are slightly upward-sloping means the variable cost increases when services receiver increases. There will be a small dip in marginal return with increase in services before marginal return rises. It implies that additional unit productions are more costly.

Considering the qualitative welfare analysis when Telecom Australia is enjoying the monopoly

  1. Government will get more tax revenue as marginal revenue will be generated.
  2. Company will get more marginal surplus but comparatively at lower rate because the cost will be higher for marginal production.
  3. Customers will benefit from the same price rate in spite of increased cost of production.
  4. Total surplus will be less for individual services.
  5. No deadweight loss

Ans: Dead Weight Losses are the losses which are created by market inefficiency due to demand and supply are out of equilibrium.

Average Total Cost Pricing. It is the policy where total current cost will be considered and average of the same will be charged as prices. Any deadweight losses i.e any loss incurred because of demand supply out of equilibrium will be ignored from the costing system.

Short Run Effects

Company will suffer the losses as it will ignore any additional cost incurred above the average cost. And consumer will benefit by less charges for the services.

Long Run Effects

In the long run the company will have the benefit of more customers.and more customers will add to more revenue and gradual increase in the marginal surplus to the company and it will reduce the average cost per unit of service provided.

(D) Ans: Alternative Price Control

Being a monopoly company in Australia Telstra’s Alternate Price control can be implemented as per marginal cost basis where all the variable cost will be considered and adding a certain percentage as contribution can be considered as the ideal price charge and marginal cost is the cost of goods or service a consumer is receiving.

Comparing the average total cost with marginal costing

In total average cost all variable cost and fixed cost are considered and it is divided among the subscribers utilizing the services. So here all the fixed cost is also considered.

But if marginal costing is followed where only variable cost will be taken and a certain percentage point profit is added to cost which will give correct pricing from customer point of view. Charge only for what they are using. Thus it will be best way.

e) Ans: Welfare Analysis in the Monopoly case,v/s. Welfare Analysis of the Long-run equilibrium outcome.’’

Here the Q1 represents the quantity. Where B is a monopoly price which is higher than Ci.e. Average Cost. In Monopoly The profit is maximum at MR=MC. However monopolists charge higher prices to maximise the profit. This generates welfare loss to the customer and society as whole. BCDE represents the welfare loss to the society.

In Long-run equilibrium Marginal Cost equals to Average Cost Which is again equal to Marginal Revenue. It means it is a no profit no loss situation. Any sales made above these levels will give profit but upto long run equilibrium point it will break even.

Here the B point of the chart is quantity, N is average cost and K is MonopolyPrice. In long run the Price = LMC =MR, which means there is no welfare loss to the customer

Particulars

Welfare analysis Monopoly

Welfare analysis Long run equilibrium

Marginal cost and Marginal revenue

MR =MC

LMC =MR

Resource allocation

Not efficient

Not Efficient

Consumer loss

Deadweight loss

No Deadweight loss

Reason for loss

Price >AC

Price=LMC

Accordingly, in a monopoly if prices are high there are possibilities of customer loss or society loss. The main reason for the same can be increasing demand and no competition. Whereas in long run equilibrium the company operates at equilibrium point and there is limited demand for the product thus there is no customer loss.

References for Monopoly Power and Economic Welfare

Demanding Innovation: The Impact of Consumer Subsidies on Solar Panel Production Costs By Todd Gerarden, (2018)(https://scholar.harvard.edu/files/gerarden/files/gerarden_jmp.pdf)

Solar brings in the big bucks for local governments Tim Sylvia,(2017)https://pv-magazine-usa.com/2019/07/30/solar-brings-in-the-big-bucks-for-local-governments/#:~:text=Statewide%2C%20properties%20that%20developed%20solar,million%20in%20the%20year%20after.

 NADIA CAMERON (2014 ), Quick wins, culture and technology behind Telstra's digital strategy(https://www.cmo.com.au/article/547998/quick_wins_culture_technology_behind_telstra_digital_strategy/)

Monopoly Power and Economic Welfare (https://www.tutor2u.net/economics/reference/monopoly-power-and-economic-welfare)

Long Run Equilibrium Under Monopoly: (http://www.economicsconcepts.com/long_run_equilibrium_under_monopoly.htm)

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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