Chapter 28: Problem 952

Explain how the purchase-and-resale differential subsidy plans as a form of government aid operates.

Short Answer

Expert verified

A purchase-and-resale differential subsidy plan is a form of government aid where the government buys goods at market price and sells them at a lower price to specific sectors or individuals. The purpose is to support these groups by making goods more affordable and accessible. The process involves the government purchasing the goods, reselling them at a lower price to beneficiaries, and recouping the subsidy cost through customary methods like taxation. This subsidy aims to positively impact the economy or society, justifying the expenditure.

Step by step solution

Defining a Purchase-and-Resale Differential Subsidy Plan

A purchase-and-resale differential subsidy plan is a form of government aid wherein the government purchases a good or product at market price and then sells it at lower than market price to particular sectors or individuals, effectively subsidizing the cost of that good for the beneficiaries.

Understanding the Purpose of a Purchase-and-Resale Differential Subsidy Plan

This type of subsidy plan is often used when the government aims to provide support to specific sectors or populations. This could be because these groups can't afford certain goods or services at market price, or to stimulate demand in a particular area. The rationale is that by subsidizing the cost, the government makes these goods more accessible and affordable.

Government Purchases Goods

The first part of this process involves the government purchasing the goods or products at the current market price. This may be done directly, or through a third party.

Government Resells Goods to Beneficiaries

Once bought, the government then sells these goods to the designated beneficiaries (such as low-income households, farmers, or specific industries) at a price that is lower than the market price. The difference between the purchase price and the resale price is effectively the subsidy amount.

Beneficiaries Reap the Benefits

The beneficiaries of such a program enjoy lower costs for the products or goods, which in turn can lead to a higher standard of living, more business growth, or stimulate economic activity in a specified sector.

Recouping the Cost of the Subsidy

The government recoups the cost of the subsidy through customary methods, such as taxation or reallocation from other budgets. The intended positive impact of the subsidy on the economy or society at large is considered justification for the expenditure.

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