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Dynamic Elasticity

Blas MOLA-YUDEGO

Summary

There are different policy based instruments that can affect markets in order to fulfilled objectives. The justification of this interventions is based on the role that different externalities play in the market development of these commodities. In the case of bioenergy, this is a fundamental topic that largely affects its implementation. There are different tools, from more aggressive approaches such as quotas and restrictions, to more subtle as promotion campaigns, green labeling or even research grants. Two commonly used instruments have been subsidies and taxes. Both act of the supply and demand curves, modifying the equilibrium points, and restricting or expanding the amount of the commodity in the market and their prices. This effect, however, is not equally distributed between the producer and the consumer, as it is related to the elasticity of the curves. The study of the elasticity will therefore help in assessing which agent, producer or consumer, obtains the main benefit (in case of subsidies) or carries the main burden (in case of taxes).

 

The effects of a subsidy varies with the elasticity of the supply and demand curves, and also they way it is shared between producer and consumer.

Fig 1. Changes in the elasticity of the demand curve makes the effect of the subsidy change the market share and the way the subsidy is spread between the consumer and the producer. Very inelastic demand with a fixed supply curve, results in most of the subsidy being directed to the consumer (p - p''). When the demand becomes elastic (flat), most of the subsidy benefits the producer (p' - p).

The effects of a tax also varies with the elasticity of the supply and demand curves, and also they way it is shared between producer and consumer.

Fig 2. Changes in the elasticity of the demand curve makes the effect of taxes change the market share and the way the tax is spread between the consumer and the producer. Very inelastic demand with a fixed supply curve, results in most of the tax burden is on the consumer (p - p''). When the demand becomes elastic (flat), most of the tax burden is on the producer (p' - p).

 

 

 

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