Question

Suppose that for health reasons, the government of the nation of Ironia wants to increase the amount of broccoli citizens consume. Which of the following policies could be used to achieve the goal? \([\mathrm{LO} 6.1,6.4]\) a. A price floor to support broccoli growers. b. A price ceiling to ensure that broccoli remains affordable to consumers. c. A subsidy paid to shoppers who buy broccoli. d. A subsidy paid to farmers who grow broccoli.

Short answer

A subsidy to broccoli shoppers (option c) is the most effective policy.

Step-by-step solution

Understand the Goal

The goal is to increase the consumption of broccoli among citizens. To achieve this, policies need to be implemented that make broccoli more appealing or accessible to the public.

Evaluate Each Policy Option

Examine each of the given policy options to determine its potential impact on broccoli consumption. - Option (a) involves a price floor, which sets a minimum price above the equilibrium price. This might help farmers but could increase prices, potentially reducing consumption. - Option (b) involves a price ceiling, which sets a maximum price below the equilibrium. This could make broccoli more affordable but might also lead to shortages due to increased demand and limited supply. - Option (c) involves a subsidy for shoppers, directly reducing the cost of broccoli for consumers, thereby increasing consumption. - Option (d) involves a subsidy for farmers, which could reduce costs or increase production, but might not directly impact consumer prices.

Determine the Most Effective Policy

Identify which policy directly encourages increased consumption among citizens by making broccoli more accessible and affordable to them. A subsidy paid to shoppers (option c) directly reduces the effective price that consumers pay, increasing their purchasing power with respect to broccoli and consequently increasing consumption.

Conclusion

After evaluating the options, the most effective policy for increasing broccoli consumption among citizens is to provide a subsidy to shoppers who purchase broccoli (option c). This directly impacts consumer behavior by making broccoli more affordable, thus increasing demand.

Key concepts

Price Floors and Ceilings

Price floors and price ceilings are government-imposed limits on how high or low a market price can go. These policies are used to control the price of goods and services in a market. Let's explore each one:

• **Price Floor**: This is the minimum price set by the government. It is typically above the equilibrium price to guarantee producers receive a fair revenue. However, if set too high, it can lead to a surplus because it raises prices above what consumers are willing to pay.
• **Price Ceiling**: On the flip side, a price ceiling is a cap on prices, set below the equilibrium to make goods affordable. While beneficial for consumers in theory, it can often lead to shortages as demand exceeds supply, because producers find it unsustainable to sell their goods at a lower price.

In the context of our broccoli example, a price ceiling could keep broccoli affordable, driving up demand. But it may also cause a shortage if farmers can't cover their costs, deterring them from producing enough broccoli to meet the increased consumer demand. On the other hand, a price floor could support farmers, ensuring their income. But it might hike the price of broccoli too much, potentially decreasing consumption.

Subsidies

Subsidies are financial aids provided to either consumers or producers to encourage the consumption or production of goods. They can be highly effective in adjusting market behavior because they directly influence price incentives. There are two notable forms of subsidies concerning our scenario:

• **Consumer Subsidy**: This reduces the cost that shoppers pay. In our broccoli case, if consumers receive a subsidy when buying broccoli, the effective price they pay drops. This can boost their desire to buy more, directly leading to higher consumption.
• **Producer Subsidy**: Paid directly to farmers, this lowers their production costs, enabling them to produce more. Although beneficial for supply concerns, it doesn’t immediately lower consumer prices. Therefore, it might not be as effective in increasing consumption as a direct consumer subsidy.

For Ironia's goal of increasing broccoli intake, a shopper subsidy would immediately make broccoli cheaper at purchase, significantly encouraging consumers to buy more.

Consumer Behavior

Understanding consumer behavior is key to predicting how they will respond to changes in price or policy. Consumers generally react to price changes in predictable ways. When prices go down due to subsidies or discounts, many will buy more. Conversely, when prices increase, they may buy less. Direct incentives, like consumer subsidies, effectively modify behavior. It's not just about lowering prices but increasing perceived value and accessibility of a product. In Ironia's case, making broccoli effectively cheaper through subsidies will likely enhance its consumption since consumers perceive they are getting more for less. Moreover, beyond price, factors such as health benefits and product availability also play roles. A well-communicated government campaign emphasizing the health benefits of broccoli, coupled with a price cut from subsidies, would likely see an optimal increase in consumer purchases.

Equilibrium Price

The equilibrium price is where the quantity of a good demanded by consumers equals the quantity supplied by producers. At this price, there is no shortage or surplus of goods. It’s determined by the intersection of the supply and demand curves in economic models. When policies like price floors or ceilings are introduced, they disrupt this balance. For example, a price floor set above the equilibrium can cause a surplus, as it encourages production while discouraging consumers due to higher prices. On the other side, a price ceiling below equilibrium can lead to a shortage because lower prices boost demand but may decrease supply. In the broccoli case, subsidies are favorable because they aim to maintain or adjust the equilibrium price relative to consumer affordability without directly imposing limits on price. They allow for market-driven adjustments while encouraging higher consumption, aligning supply and demand sustainably.