The effect of subsidies on consumer's surplus

Research output: Chapter in Book/Report/Conference proceedingConference paper

Abstract

The EU policy with regard to State aid is a regularly debated topic in multiple branches of the academic literature. Interest in the subject is growing and techniques used by the European Commission to assess its effects have evolved over time. However, too little is known about the economic impact of State aid measures. In addition, questions are being raised about the welfare standard used when evaluating aid proposals made by Member States. More specifically, a shift from a focus on producers and market towards a broader welfare measure, including the effect on consumers, is called for. In response, this paper models the effect of subsidies on consumer's surplus. A duopoly in Bertrand competition is studied. The effect of granting a subsidy to either one or both duopolists is calculated and compared to a situation without aid. In both cases, consumer's surplus increases compared to the situation without aid. In this way, the effect on consumer's surplus can be quantified and should in a case analysis later be compared to effects on producer's surplus and government cost. The quantified effect on consumers can also be seen as a measure for how well a market failure is targeted, i.e. it allows us to measure the usefulness of an aid by looking at the value for the end-user of a product or service.
Original languageEnglish
Title of host publicationProceedings of the Advances in Business-Related Scientific Research Conference
EditorsA. Bostjan
PublisherEdukator Koper
ISBN (Print)978-961-92917-3-3
Publication statusPublished - 2012
EventAdvances in Business-Related Scientific Research Conference - Venice, Italy
Duration: 28 Mar 201230 Mar 2012
http://www.absrc.org/past-absrc-venice-2011.html

Conference

ConferenceAdvances in Business-Related Scientific Research Conference
CountryItaly
CityVenice
Period28/03/1230/03/12
Internet address

Bibliographical note

Bostjan A.

Keywords

  • Subsidies
  • consumer welfare
  • theoretical model

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