The purpose of subsidizing the fertilizer is to provide resources in order to lower the production cost of farming, to he poor who can't afford it, subsidies have the potential to bring an equitable distribution of economic well-being if the free market can't adjust itself to the equilibrium (Classical model point of view suggested that in an economy, prices and wages freely adjust to the ups and downs of demand over time in long run).
Supply of fertilizer Price of fertilizer in GHZ Market of Fertilizer in Ghana Excess supply s IQ Quantity of fertilize in Kegs S= Supply of fertilizer with subsidies Demand of fertilizer SSL=Supply of fertilizer with lessen subsidies The leftward shift of supply curve indicates that for any given price, less is being applied, or tort any given quantity, price is higher, in the graph S 1 indicated less of fertilizers is being supplied, quantity decreased from Q > IQ, create extra burden to farm to cover their cost of production and also creates upward pressure on price, to remain covering the real cost of production(including the cost of all resources used and the cost of not employing those resources in alternative uses), they Have no choice but to increase the price( P>UP ), which could have some effect on the willingness of consumer to purchase the product, depending on their PEED(PEED s the measure of the responsiveness of consumer or producer to a change in price of a good or service), different PEED has different extend of effect on change in quantity due change in per unit price, if PEED of consumer is high, there will be higher excess supply exist, and production surplus may end up as waste, and welfare losses(indicated by shaded areas). To solve this problem, government should impose higher consumption tax to have more funds to support the country, if more tax collected, therefore sustainability of subsidizing programmer will recover to the sufficient level. Price of fertilizer in GHZ Supply of subsidized fertilizer shift outward to the original equilibrium price level from SSL to S, the gap between S and SSL reduced, excess demand also eliminated.
Subsidy helps farmer to lower their cost of production which is good for competitiveness, because when there is more available resources it will bring down the price, with subsidy they can cover their cost without making the price of the good unaffordable for overall consumer, especially poor countries. However, higher tax may result in higher tends to government or lesser consumption because tax brings p the price, higher price can result in a downward pressure on demand. Subsidies are costly, government will need to collect more tax from consumer if they don't have enough funds, or they have to borrow more money from other countries which may increase budget deficit. Some farmer may have sufficient amount of capital to support their production, so some times it is difficult to decide who may receive the subsidy, and the farmer who does not receive the subsidy will somehow feel unfair about it.
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Subsidy can attract more firm to entry the market, which may result in a Geiger competition, good thing about higher competition is it can bring down the price and sometimes increase the efficiency of firm, but if there is too many firm exist even if the demand does not require these, it can create production surplus which sometimes may ends up as waste or welfare losses. And if the firm became highly rely on subsidy, the efficiency of firm will decrease therefore government will have to keep on subsidizing to maintain the market equilibrium price level of supply. Hence, it is a dilemma to achieve both economic goals at the sometimes, government should wisely choose an appropriate one.
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