Internal Assessment

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Source of the article: Taiwan News
Date of the article:Nov.10.2023
Date the commentary was written:5/14/2024
Syllabus: Microeconomics

TAIPEI (Taiwan News) — The Japanese government is looking to provide Taiwan Semiconductor
Manufacturing Co. (TSMC) with 770 billion yen (NT$15 billion) in aid for a second chip fab in
Kumamoto prefecture, according to Nikkei Asia.
TSMC is building its first Japanese fab in Kumamoto, which is expected to be ready for
commercial production in December 2024. The project is expected to cost around US$8.6 billion
(NT$278 billion), of which Japan’s Ministry of Economy, Trade and Industry (METI) is providing
around US$3.5 billion in subsidies to TSMC.
In total, the Japanese government is looking for 2 trillion yen in budget financing to help
semiconductor production and development in generative AI technology, Nikkei said. METI said
it wants 650 billion yen for Japanese chipmaker Rapidus and an Intel research center, in addition
to support for advanced chip designs.
Meanwhile, about 460 billion yen is being proposed for a new facility by Taiwan’s Powerchip
Semiconductor Manufacturing Corp. (PSMC) in the Miyagi prefecture. The remaining 190 billion
yen will go toward the development of supercomputers to process data for AI learning models,
per Nikkei.
Japanese reports in July said that TMSC was planning to construct a second fab in Kumamoto,
with construction set to begin in April 2024. This second fab would begin commercial
production of 12nm chips in 2026.
The Japanese government's decision to provide Taiwan Semiconductor Manufacturing Co.
(TSMC) with 770 billion yen in aid for a second chip fab in Kumamoto prefecture illustrates a
strategic allocation of resources towards semiconductor production. Through this allocation, the
government aims to stimulate economic growth and technological advancement in a key
industry. The provision of subsidies to TSMC represents a form of financial assistance designed
to incentivize investment and promote the expansion of semiconductor manufacturing capacity.
These subsidies serve as a targeted intervention by the government to address market failures
and encourage private sector participation in critical sectors such as technology and innovation.
Overall, Japan's strategic allocation of resources and provision of subsidies to semiconductor
companies exemplify a proactive approach to industrial policy, where government intervention
is employed to promote innovation, investment, and economic growth in strategically important
sectors.

The diagram shows the change of the TSMC product and price change and supply change after
the government intervenes by granting a subsidy. Subsidy is an amount of money per unit of
output paid by the government to a firm. Initially the equilibrium was established at (Pe,Qe). At
(S1,D). The supply is defined as the amount of good/service that a producer is willing and able
to supply at a given price. Then as the Taiwan government grants a subsidy to fund a project and
start to produce commercially, Demand is defined as the amount of good/service that a
producer is willing and able to consume at a given price thus this intervention caused the supply
to increase thus the supply shifts rightwards, thus producers will gain revenue as shown on the
diagram on point (Q1,P2)Finally the equilibrium was realized at curves (Q1,P1) at points (S2,D).

As the government grants a subsidy some stake holders are affected positively or negatively.
As producers are profit maximizer, there revenue increases from area (Pe,Qe) D1- area(P1,Q1)
moreover the producer will gain subsidy revenue as shown on the diagram on curve
(Q1,P2) .They will be incentivized to allocate more FOPs into the computer chip market, the
total output of corn will increase, this means manufacturers income will increase as it will
improve. Moreover, they will start hiring more farmer who are usually low-income earners, so
the economic well being will improve. The manufacturers are very dependent on the
government intervention, they have no motive to improve their efficiency which leads to a loss
of scarce resources. This leads to overspecialization in certain markets at the expense of other
products. Therefore, decrease the choice of consumers.
As for consumers, the introduction of subsidies in the chip market will lead to an outward shift
to the right in supply, thus causes a decrease in price from Pe-P1. This enables consumers to
have the ability to buy more at a lower cost. As there is an increase in supply thus the shift in
quantity from Qe-Q1 consumers have more availability to purchase basic necessities, with the
increased availability of chips, and decrease in price, this contributes to a more advanced
technological sector in the economy. A surplus in income may lead to consumers to buy
additional goals, such as secondary market as consumers is spending less on basic necessities.
Although with the increase output of chips in the market, consumers are deprived from other
goods. If consumers want to purchase other goods, they will likely pay an increase in tax to
finance the gov expenditure.
With the addition of a subsiding the chip market, the government will be forced to increase in
tax income as consumers are spending less on other products, this will allow the government to
increase their tax income, the popularity of the government can also increase, as a subsidy can
lower cost of production of chips for producers which can lead to a decrease in price for
consumers. Moreover, by implementing a subsidy the government can support key industries
and ensures the availability of chips. The GDP of the country will improve as the consumer is
more likely to spend, improving the economic wellbeing. A low unemployment rate as there will
be an increase of job opportunities in the primary sector. Although there will be an opportunity
cost on the government as the funds are used for subsidizing chips which could have been used
elsewhere. There may be a tax increase on the economy to finance the gov expenditure, the
government may increase local barrowing and/or international borrowing which decreases
political sovereignty.
Lastly, workers will be better off since unemplyment will decrease as more job opportunities
emerge, this is due to the increase in quantity of chips, thus manufacturers are in need of more
workers to keep up with the markets need of chips, as a result decreasing the unemployment
rate.