Government Intervention

Micro Economy
Unit 3
Subsidy

 It is a direct payment made by the Government to the producers to

reduce the cost of production and increase the quantity supplied in the
market.
Impact of a subsidy
Why subsidy is provided?

 to keep down the market prices of essential goods

 to encourage greater consumption of merit goods
 to contribute to a more equitable distribution of income
 to provide services that would not be provided by the free market
 ■ to raise producers’ income, especially in the case of farmers ■ to provide
an opportunity for exporters to sell more goods ■ to reduce dependence
on imports by paying subsidies to
 domestic producers of close substitutes.
Limitations of subsidy

 High Opportunity cost – the funds could have been spent else where
 Offered as blanket amount to all the citizen and cannot be granted based
on income – Mass transit, essential items
Case study
Transfer payments

 Transfer payments are payments made by the Government to the

vulnerable groups of the society who are unable to work and need
assistance. These group could consist of unemployed, elderly citizens,
retired personnel, very poor people.
Transfer Payments could be in the form
of
 old age pensions
 unemployment benefits
 housing allowances
 food coupons
 child benefits.
Flip side

 Disincentive to work

 Huge burden on the Government

 Dampens economic activity

Case study
Direct provision of goods and services

 The Government provides certain goods and services free of charge to a

certain section of the society to ensure equity.

 Education, Health care

Limitations

 Resources are not optimally allocated

 Drive out profit motive – hence inefficient

 Long waiting period, everyone cannot be accommodated

Conditional cash Transfer – Bolsa
Familia
 Brazil’s conditional cash transfer scheme, Bolsa Familia, has helped 36 million
citizens emerge from extreme poverty since 2003. Through Bolsa Familia, the
country’s poorest households are given a monthly cash handout of $22 on the
condition that children go to school and get regular health check-ups. In the 14
years since it began, the pioneering program has been replicated in some 40
countries across the world, including Mexico, Indonesia, South Africa and
Morocco.
 In the ten years since Bolsa Familia was introduced, the percentage of Brazilians
living in extreme poverty has halved, from 9.7% to 4.3%. Income inequality has
also been reduced by 15%. The scheme has incentivised parents to invest in
their children's future by making health check-ups and regular schooling a
requisite for receiving direct cash transfers. Now, children are 10% more likely to
attend school if their parents receive Bolsa Familia checks, and expectant
mothers are 25% more likely to get health checks.
Research Assignment

 Research assignment:

 Conditional cash transfer is more efficient than that of direct provision of

goods and services. Do you agree with this statement.

 Write a report citing real life examples justifying your opinion.

Nationalization

 Process whereby the private sector firms are transferred into public
ownership and are owned and controlled in someway by the Government.
Advantages and Disadvantages of
nationalization
Privatization

 Privatization refers to the transfer of ownership from the public sector to the
private sector.
Advantages and disadvantages of
privatization
Advantages and disadvantages of
privatization