Economics for Managers: Subsidies and Welfare Effects

Economics for managers

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
1. Should we use subsidies to correct inattentive consumers?...............................................3
2. Analysing the welfare effect of subsidies..........................................................................4
3. Analysing the welfare effect of the CFL subsidy with respect to the new information.....9
4. Is subsidy to the purchase of CFLs is a good policy?......................................................11
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................14

INTRODUCTION
Economics for business refers to the application of the economic theories in the
studies of the business organization along with effectively analysing the market related and
environmental issues which is being faced by corporations. The business economics involves
the application of various concepts like the scarcity, production factors, distribution and
consumption. The economics in business is having a huge impact over the decision-making
processes of an organization. The strategic decisions of the business entity represented in
either profit or loss. But the principles of economics are intended to influence and guide the
corporate business strategy and decisions in order to achieve the better outcomes for the
concern. This report provides an insight into the various theories of economic and its impact
over the demand and supply of the goods under various scenarios.
MAIN BODY
1. Should we use subsidies to correct inattentive consumers?
In US, the adoption of new high efficiency CFL bulbs has been slow even though it
results into energy saving which outstrips the cost of most of the bulbs. This is mainly due to
lack of awareness or inattention of the consumers and if they are able to flock to CFL then
they would be able to understand the true benefits of it. But there can be other reasons as well
which the consumers might consider incandescent bulbs and has nothing to do with the
inattention. The change in the willingness of the to pay for CFL after getting the right set of
information is called the attentional bias. It has been stated that if the consumers are well
informed and is having less or no attentional bias. These biases are considered to be small if
they do not care about the new information that they learn. If the consumer is not worried
about saving money for the future, then it will be waste to inform them about the savings as
their light bulb’s preferences will not change (Should we use subsidies to correct inattentive
consumers? 2015). On this note it was considered to use aggressive education campaign as a
one policy response to an inattentive group of consumers. It was considered to be very costly
in giving three-minute lesson on cost and benefits every time the consumer decides which
lightbulb to be purchased. On the other hand, the alternative approach to this is offering
subsidy on CFL bulbs which will help in drawing attention of the people which is equal to the
education campaign. But there was certain argument in respect to implementation of this
practice if the people with no attentional bias are induced to purchase CFL or if the large set
of people are already willing to buy CFLs in their uninformed state as well. Therefore, it

resulted evaluating this policy further as it is important to not only measure attentional bias
but also how it is distributed across the population.
After conducting a survey, the actual result cannot be determined as it involves the
both the haters and the lovers of CFL bulbs even after knowing the benefits. In addition to
this, it was also determined that the harm which will be derived from the ban on incandescent
might outweigh the advantages. There are chances that the ban might move some of the
consumers towards the correct path, but there will be small group of population that will
highly value incandescent will be harmed much more. The traditional style of incandescent
are no longer available in US with some exception but based upon the experiment conducted,
subsidy is considered to be the bets option. But this is not an easy task as the analysis shows
that the calculating the right amount of subsidy in order to meet with the customers
inattention needs the policy makers to gather specific information pertaining to the biases of
the population along with the variation in the biases among the different consumers. This is
important to be noted by policy makers who are implementing the behavioural motivated
policies.
2. Analysing the welfare effect of subsidies
(a)
Consumers and the producers react differently in respect to the change in the prices. The
higher price would tend to decrease the demand while on the other hand, encourages supply,
also the lower price would increase demand and reduce supply. Based upon the economic
theory, in the free market, there is a single price which results into bringing the demand and
supply of a particular product to the balance which is called as the equilibrium point (Yu,
Tang and Shen, 2018). It is also called as the market clearing price as the at this price, the
quantity of the product producer brings to the market is purchased by the consumers. This
results into the situation of on excess supply nor shortage. In the below graph, it can be
clearly stated that the at price 30, the demand and supply is at equilibrium point with 1000
quantity.