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Lecture Notes In 11 Public finance Collected by Dr: Abeer Abouelmagd 2026.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance Chapter Two Effects of Public Expenditure 3-Transfer payments and Subsidies We can classify it to: A- Transfer payments: it represent transfers of money, such as social security payments, pensions and unemployment grant, financial aid to economic sector (business). (This payment does not involve transactions of goods and services). B- Subsidies In kind such as medical insurance. C- Subsidize the prices of certain goods and services such as public housing was rented at rates less than the market rent. In the next section we will discuss the effect of Transfer payments and Subsidies 25.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance 3- Transfer payments and Subsidies A- Transfer payments -The effect of Production subsidy A Production subsidy or government incentive is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy. Subsidies come in various forms including: direct (cash grants, Interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation). The most common forms of subsidies are those to the producer cash grants to producer. Subsidies for producer/production ensure producers are better off and it commonly reduces the price of goods and services to the consumer. 26.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance The following figures illustrate how the unit subsidy affects the output and price. A unit subsidy is a specific sum per unit produced which is given to the producer. Case 1: Suppose the market is competitive, and its marginal cost is increasing, and the government decides to give the producer a unit subsidy per unit. Price Producer receives this price Consumer pays this price c QI Q2 Quantity/output "The economic effects of production subsidy" Before a subsidy: Competitive equilibrium point is A, where the demand curve (D) is cutting the elastic supply curve (Sl) at a specified price Pl and quantity QI. - Consumer surplus is the area below the demand curve but above price Pl ANAPI 27.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance After a subsidy: When the government decides to give the producer a unit subsidy the marginal cost will decrease therefore, the supply curve will shift in parallel downwards (from Sl to S2) by the amount of the subsidy. The new equilibrium point is B, where the demand curve (D) is cutting the new elastic supply curve (S2) at a specified price P2 and quantity Q2. Consumer surplus is ANBP2. So the change of consumer surplus (welfare gain to consumer) is ABPlP2 In the diagram, the subsidy per unit equals the vertical distance between the two supply curves is BC. The total subsidy amount (The overall cost The overall cost of the government's subsidy) is CBP2P3 The quantity (Q2) after Gov. intervention x the subsidy per unit (BC) However, the price the consumer pays does not fall by the full amount of the subsidy — instead it falls from Pl to P2, the producer gets some of the benefit in terms of extra revenue that they can keep. 28.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance Hence in this case the benefit of subsidy divided into two parts: The benefit to the consumer is (GB) Pl P2 per unit and the whole benefit to the consumer is the area PIGBP2. The benefit to the producer is (CG) =P3P1 per unit and the total gain to the producer is CGPlP3. In this case the benefit to the producer is smaller than the benefit to the consumer (Why? the answer in the next cases, where we will examine the Effect of subsidies if the elasticity of the supply curve varies. 29.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance Case 2: Suppose the market is competitive, and its marglnal cost IS constant, and the government decides to give the producer a unit subsidy per unit. Price B: QI Q2 Quantitv/output Before a subsidy: Competitive equilibrium point is A, where the demand curve (D) is cutting the elastic supply curve (Sl) at a specified price Pl and quantity QI. Consumer surplus is the area below the demand curve but above price Pl ANAPI After a subsidy: When the government decides to give the producer a unit subsidy the marginal cost will decrease therefore, the supply curve will shift in parallel downwards (from Sl to S2) by the amount of the subsidy. The new equilibrium point is B, where the demand curve (D) is cutting the new elastic supply curve (S2) at a specified price P2 and quantity Q2. 30.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance 1 Consumer surplus is = ANBP2. So the change of consumer surplus (welfare gain to ABPIP2 consumer) is In the diagram, the subsidy per unit equals the vertical distance between the two supply curves is BC. The total subsidy amount (The overall cost The overall cost of the government's subsidy) is BCPlP2 The quantity after Gov. intervention(Q2) x the subsidy per unit (BC) Note: in this case, the price the consumer pays decreased by the full amount of the subsidy from Pl to P2, so the benefit to the consumer is (BC) Pl P2 per unit and the whole benefit to the consumer is the area BPICP2. And the producer does not get any benefit of subsidy. Hence In this case the consumer gets all benefit of subsidy while the benefit to the producer equal zero. Why? Because the supply curve is perfectly elastic So we can say: The more elasticity of supply, the less the benefit of subsidy to producer 31.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance To what extent a subsidy will reduce prices for consumers as demand curve elasticity changes? The following figures illustrate the effects of subsidies as demand curve elasticity changes. Elastic demand curve Pric Subsidy QI Q2 Quantity Inelastic demand curve Pric c QI Q2 Subsidy Quantity Subsidy has a larger effect on the Subsidy has a larger effect on the new equilibrium quantity. new equilibrium price. The previous figures illustrate the effects of subsidies depends on elasticity of demand. The more inelastic the demand curve the greater the consumer's gain from a subsidy. Indeed when demand is perfectly inelastic the consumer gains all the benefit from the subsidy since all the subsidy is passed to the consumer through a lower pnce. 32.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance When demand is elastic, the main effect of the subsidy is to increase the equilibrium quantity rather than lead to 1 a much lower market erice. So we can say: The more elasticity of demand, the less benefit of subsidy to consumer . Exercise Suppose a commodity is produced in a competitive market, and its marginal cost is increasing. The Supply curve is more elasticity than the demand curve. The equilibrium price equals L.E 60 per Ton and the quantity at this price equals 100 Tons. The government decides to give the producer a unit subsidy at L.E 30 per Ton; as a result the quantity of production will Increase to 120 Tons and the price will decrease to L.E 40. According to this information: 1- Draw a graph to represent this case. 2- specify the producer price and the consumer price after the government Intervention 3- Calculate the change m the consumer surplus. 4- Calculate the overall cost The overall cost of the government's subsidy 5- the benefit of subsidy to the consumer 6- the benefit of subsidy the producer 33 1.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance The answer: 1- The graph. Price P3=70 P1=60 - P2=40 c B QI Q2 100 120 Quantity/output 2- The producer price after a unit subsidy — 70 The consumer price after a unit subsidy 40 3- The change in the consumer surplus = 0.5 (basel+ base2) x the height 0.5(100+120) 0 ABPIP2 (Welfare gam to consumer) 4- The overall cost ofthe government's subsidy = CBP2P3 the quantity (Q2) after subsidy subsidy per unit (BC) ¯ 120 x 30 ¯ 3600 5- the benefit of subsidy to the consumer = — PIGBP2 120 x 20 2400 6- the benefit of subsidy the producer ECGPIP3 = 120 x 1200 34 the.

Dr: Abeer Abouelmagd 2 Lecture Notes In Public finance Lectures notes based on the following resources: David N. Hayman, (2011). Public Finance: A Contemporary Application of Theory to Policy (10th Edition). South-Western, Cengage Learning . Harvey S. Rosen/ Ted Gayer, (2008). Public Finance, 8th Edition. McGraw-Hill Book Company. Hugh Dalton. (2013). Principles of Public Finance. 1st Edition, Psychology Press. Joseph E. Stiglitz (2000). Economics of the public sector(3rd Edition). W. W. Norton & Company. Richard A. Musgrave/Peggy B. Musgrave. 1989. Public Finance in Theory and Practice_(5th Edition). McGraw- Hill Book Company. 35.