"Subsidies are inefficient since they lead to a deadweight loss." Do you agree? Use diagram to illustrate your answer.
Answers
Answer:
I don't agree with your statement. Subsidies help keep prices of some essential commodities in check so that they can be affordable for Citizens'with limited resources.
Subsidies are given by government and government is not formed to earn from business, so it's absolutely not a matter of profit or loss. Subsidies are financed by the taxes paid by the citizens.
If you read balance sheets of companies, and see the value addition for core products like steel, they used to be 1:2, that is basic raw material of Re 1 was sold for Rs. 2 including all the processing charges and other inputs.
With the economy opening up I suspect these margins have gone haywire. Evaluate the price of Gillette razor or any medicines or even packaged raw food items like flour. Let's take the example of flour. Companies that make flour buy wheat from the Farmers in the states where MSP is not
Well, since I am not writing your thesis for you I will forgo the diagrams. But I will ask you some questions of my own.
What is a subsidy?
If a good or service cannot command a profitable price on the market what would normally happen to the production of said commodity, good, or service without a subsidy?
If a good or service is no longer needed by the market what do people do with the time and resources they no longer dedicate to producing that good, service or commodity?
Lastly, what is the effect of a subsidy on the previous answers?
Subsidies invariably are destructive beyond stage 1.