Chinese ejiao's ( i.e. donkey gelatin) producers are asking for a government subsidy on donkey production. In this work, we will see if this subsidy should or not be applied. In this market there is a market failure (when a market doesn't work well, leading to misallocation of resources), created by an externality (a cost on third parties not accounted on the price definition of a good or service1 ).
In this case, we have a positive externality of consumption, in which, from the market point of view, there isn't enough ejiao being supplied, meaning the optimal quantity is not being consumed. We consider ejiao a merit good, since it makes you more resistant to blood problems2. This means that society gains from the consumption of ejiao. …show more content…
The government expenditure will be equal to the area of A1,which the government might not be willing to spend, as it may think that it is not worth to use money from all tax payers in order to help the ones that are in the ejiao market. The donkey suppliers may now decrease or increase their revenue from sales, depending on the elasticity of the demand curve. However with the value of the subsidy they will end up receiving more money than before (area A1 and A2). All donkey consumers (including the ejiao producers) are now happier, as they can buy more donkeys for less …show more content…
The decrease of the price of donkeys will also mean that the production costs of ejiao will decrease, hence shifting the supply curve to the right, answering the high demand1, and increasing the welfare gain.
The following result would thus be seen in the ejiao market2:
Since the supply has now increased, and Q* is now being consumed, we can say that market is nearer allocative efficiency (remember there wasn't enough ejiao being supplied to the market), and the welfare gain has now been increased. As the article says, “ In the 1990s, China had 11 million of them [donkeys], but that has fallen to six million, and the population keeps dropping by about 300,000 a year”. It is arguable whether the killing of donkeys for ejiao is the reason why the number of donkeys is decreasing, or if ejiao is the only reason why donkeys are still being produced (since donkeys are now being substituted by machines in agricultural activities1), this is a situation similar to that of the bullfights in Spain2. We should also mention that the donkey breeders are part of rural population, meaning this subsidy would help distributing money to these
In this case, we have a positive externality of consumption, in which, from the market point of view, there isn't enough ejiao being supplied, meaning the optimal quantity is not being consumed. We consider ejiao a merit good, since it makes you more resistant to blood problems2. This means that society gains from the consumption of ejiao. …show more content…
The government expenditure will be equal to the area of A1,which the government might not be willing to spend, as it may think that it is not worth to use money from all tax payers in order to help the ones that are in the ejiao market. The donkey suppliers may now decrease or increase their revenue from sales, depending on the elasticity of the demand curve. However with the value of the subsidy they will end up receiving more money than before (area A1 and A2). All donkey consumers (including the ejiao producers) are now happier, as they can buy more donkeys for less …show more content…
The decrease of the price of donkeys will also mean that the production costs of ejiao will decrease, hence shifting the supply curve to the right, answering the high demand1, and increasing the welfare gain.
The following result would thus be seen in the ejiao market2:
Since the supply has now increased, and Q* is now being consumed, we can say that market is nearer allocative efficiency (remember there wasn't enough ejiao being supplied to the market), and the welfare gain has now been increased. As the article says, “ In the 1990s, China had 11 million of them [donkeys], but that has fallen to six million, and the population keeps dropping by about 300,000 a year”. It is arguable whether the killing of donkeys for ejiao is the reason why the number of donkeys is decreasing, or if ejiao is the only reason why donkeys are still being produced (since donkeys are now being substituted by machines in agricultural activities1), this is a situation similar to that of the bullfights in Spain2. We should also mention that the donkey breeders are part of rural population, meaning this subsidy would help distributing money to these