First Home Owners Grant
The First Home Owners Grant (FHOG) helps people to buy or build their first home in Australia and to counter the effect of Goods and Sales Tax (GST) on it. It was started in 2000 and was administrated and financed by the federal government. The total amount of grant is A$7000. A person can apply for the FHOG direct at the state revenue office or through approved local bank. Government has set some criteria to release the first home owner grant.
If we consider that the demand of the new home buyer as inelastic, the symptom of GST was feared to be all take on by the consumer. Let us consider P is initial price of house. GST affects it and it rises to P'. The demand is inelastic, so GST affects the consumer. Therefore, to counter the impact of GST, government gives the grant to the consumer.
The Federal Government comes with its own plan to counter the effects of current global financial crisis on Australia market. It assists the housing market to stimulate the economy as whole. The main goal is to help the first home buyer to enter the housing market and to support the construction industry. Government added some scheme to boost the first home owner such as new first home owner boost, regional bonus and first home bonus etc (First Home Owner Grant 2009).
The Australian housing market is always short of total number of required houses every year (ABC News). So, this scheme improves the chronic shortage of houses as it encourages people to buy and build more houses as well as it helps to create more job opportunities for the people. Also, it helps to recover from the global financial crisis.
Question 2:
When producer gets the subsidy, there is increase in the supply of goods. It results in the shift the supply curve in the rightward direction from S to S'. Also, the equilibrium quantity increases from Q to Q' and price decreases from P to P'. This shows the fall in the price of goods.
The demand of the goods increases, when a consumer gets the subsidy. It leads to demand curve shifts to the rightward direction from D to D'. The equilibrium price increases from Q to Q'. Also, equilibrium price increases from P to P'.
Therefore, we can say that a subsidy always increase the equilibrium quantity. However, the equilibrium price move down when subsidy is paid to producer and goes up when it paid to the consumer.
Question 3:
Let us consider that the demand for the first home grant is perfectly inelastic as they are looking for their first home. Because of the inelastic demand, the probability of being ill used by the sellers is more. Here, government helps the consumer by providing them a first home grant. Government has set particular criteria to release the first home owner grant. The person who is interested to take this grant has to fulfil that criteria and make himself eligible for the FHOG.
By assuming that a huge proportion of society qualify for the grant and there are very few who was not able to qualify. P is the initial equilibrium price. As the large number of people has been qualified for the grant, the supply curve of overall housing market will shift from S to S' and equilibrium price comes down to P'. The price which will be paid by everyone in the market is P'.
As the supply curve has already been shifted from S to S', the qualification for the grant will not make any difference to the equilibrium price.
Now, let us consider the vice versa of above i.e. only small group of people has qualified for the grant and large group of people didn't qualify. Now, this doesn't affect the supply curve and it won't be shift. The final supply curve will be the same as S. Also, the qualification status doesn't bother the equilibrium price so it will also remain same as P.
Question4:
Let us consider that the market for new home buyer has an inelastic demand. The demand and supply graph before the grant will be as shown in the figure given below. There is no Consumer Surplus(CS) at the price P* as shown in the blue are of the graph.
Now, when the new home buyers get the grant, the supply curve will shift to the rightward direction i.e. S to S'. With this, the equilibrium price will become P'. Here the Consumer Surplus will exist there, shown in the green shaded region of the graph. The Producer Surplus will shift to the new are shaded as blue in the graph. The Grey area represents the Dead Weight Loss (DWL). The Producer Surplus (PS) remains unchanged as before the grant but shifted to new region.
The government is paying grant to the consumer for the new home i.e. the government revenue is decreasing
We can conclude from the above discussion that with the effect of grant on the market:
• There is increase in the Consumer Surplus.
• The producer surplus remains unchanged
• The Government revenue is decreased.
Question 5:
The market structure best represents the market for new homes in Australia are Monopolistic Competition. The market structure which makes it monopolistic has the following characteristics:
• Huge domain of firms: In Australia, huge numbers of firms are present. They all are competing with each other for the selling of new homes in their country market.
• Differentiation in Product: Every firm is giving different product in the new home market. It has its own specific attribute which differentiate it from the others.
• Entry and Exit: There are no entry and exit constraints for the firms in the housing market in Australia.
• Marketing and Quality Competition: The new home market firms compete on their quality and marketing with respect to the price
Question 6:
Supply Elasticity of housing is the degree of responsiveness of the home owners to be willing to sell their houses, keeping all the other factors influencing the selling plans as constant. Generally, higher the price, greater is the intended supply and vice versa.
“Housing supply is quite elastic” here means that the demand curve tendency in the long run is elastic i.e. value is greater than 1 and moving towards infinity. This means that the percentage increase in the quality supplied exceeds the percentage increase in price.
If we consider the elasticity of supply as quite elastic, it means that percentage increase in the quantity supplied exceeds the percentage increase in price. This results decrease in the marginal cost per every more unit of production. It will change the slope of marginal cost curve to flat MC' from steep MC. Basically, for the longer period, the supply of houses is to be elastic, which should bring the cost of production per house to new low.
Question 8:
Similarities between Monopolistic and Perfect competition
1. The numbers of firms in the competition markets are large in both perfect competition and monopolistic market.
2. Free entry and free exit exists in both types of the market. In the long run, it gives Zero economic profit for that particular firms. If a firm make an economic profit, the new firm is entering in the industry. As a result the overall price decreases and basically economic profit eliminates. When the firms face the economic losses, they leave the industry which resulting increase in pricing and increase in profit. Firms neither enter nor exit the market in the long run and they make zero economic profit.
3. All consumers and producers are well known about the prices.
Dissimilarities:
1. A firm can produce in an excessive capacity if it is producing below its efficient scale. Where the average total cost is minimum, the quantity of goods produced could rise at that point as shown in the graph.
e.g. In the graph the efficient scale for the company is 500 foot ball a day, but it can produce only 400 foot ball a day. It leaves 100 foot ball behind as an excess capacity. It is not possible for the firm in the perfect competition.
2. When the price exceeds the marginal cost, it is called mark up. In perfect competition market it is not possible as P=MC (Price=Marginal cost).In the graph shown below firm's mark up from 50 to 100.
Question 9:
The graph (i) shows the industry in long run for which the demand curve is Do and So is the supply curve. Po and Qo are the industry equilibrium price and quantity output respectably. The graph (ii) shows a firm in the same industry but in the initial long run equilibrium which produces qo quantity and zero economic profit.
For the graph (i), let us consider that with the increase in demand the demand curve shift towards the right direction from Do to D1.The quantity is increasing from Qo to Q1 and price rises from Po to P1.
Graph (ii) displays the position for the firm. Firm makes an economic profit as the price is now above the minimum average total cost. The firm adjusts its output to maximise its profit by keeping marginal cost equal to the market price (MC=MP). At price P1, both are producing Q1 and q1 respectably.
As each firm is maximising its profit, the industry is in short run equilibrium. As each firm is making an economic profit so it is not in long run equilibrium. It indicates the entry of new firms in the industry. The industry supply increases from So to S1 and market price start falling with the entry of new firms. Finally, the economic profit comes to zero and market price reaches to its original level. Each firm in the industry makes a normal profit. With zero economic profit, no new firm will enter and no one will exit. Industry came back in long run equilibrium and the supply remains at S1 and the output is Q2.
Question 10:
The whole article is the case study presented by Edward Glaeser and Joseph Gyourko against the United State Government's attempts to enhance the prices in the housing market. They have given several reasons and key points against the housing price supports. The article argues that any effort to boost up the prices will finally exaggerate the construction larger than the prices. This artificially boosting will lead to the inflation of construction costs greater than the prices. The process of reselling the houses from the buyers to the sellers is called artificially boosting and it does not seem rational as the home owners are richer that the renters. So, the use of government revenue for the price boosting is not fair. They believe that the housing prices are still 30% more than the past few years. The inefficiency has also been created by the artificially boosting because of its high price. In America, 2 million housing units has been constructed in 2005 06 which is huge. Large number of built houses are still exists at that place but now with lesser price. Therefore, it encourages to build more house in this area.
Government is giving more proposals like decrease in interest rate to the target inelastic market than the elastic market which are less wealthy. Any subsidy given to the consumers will transfer to the producer, which is not fair market and results in more construction which ends up with inefficiency.
We will take the help of graph to understand the authors point that the subsidy basically end up in being with the producers. D and S represent the demand and supply curve before the equilibrium. P* is the equilibrium price and Q* is equilibrium quantity.
After the subsidy has been paid, the houses supply will increase which shift the supply curve to S'. The new equilibrium price is P' and Q' is the new equilibrium quantity. But now, the Dead Weight Loss occurred which is shown as Red region in the graph. This is happening because the housing supply is more than the demand of the housing, which bring Inefficiency in the market
Question 11:
Most of the growing countries are giving the subsidies to their farmer and grains material. It helps the people who are living below poverty line and the people who are unemployed to afford these grains. Government decreases the rate of goods and services for the consumers and increases the spending. However, the producer is getting the same money which means that the wealth is transfer to the producers only. The poor people are not getting any financial advantage as wealth is not reaching to the poor people and also because producers are not reducing their price. This step of the government create an inefficiency in the market as the price of the good as for example the price of the same grain will be high on one shop and low on the other shops.
Most of the growing countries are giving the subsidies to their farmer and grains material. It helps the people who are living below poverty line and the people who are unemployed to afford these grains. Government decreases the rate of goods and services for the consumers and increases the spending. However, the producer is getting the same money which means that the wealth is transfer to the producers only. The poor people are not getting any financial advantage as wealth is not reaching to the poor people and also because producers are not reducing their price. This step of the government create an inefficiency in the market as the price of the good as for example the price of the same grain will be high on one shop and low on the other shops.
In some countries, government uses this subsidy policy plan to take the dual advantage. For example, in July 2009, Government of India announced a policy to provide the subsidy on the installation of Solar systems. Only the buyers of solar system will get the subsidy. By giving the subsidy on solar installation, it will have dual effects. It helps in both way as on one side to cut down the pollution costs in India and on the other hand it helps to provide the way out for the current energy crisis in India by providing some different source of energy.
The government of China also came up with some subsidy policies. It provides the subsidy for the buyers who want to purchase the hybrid car. It will help to enhance the production and use of the hybrid cars in China. It also helps to cut down the extra fuel cost on the vehicles and the pollution costs.
Now, let us consider that the demand for houses in Australia is inelastic.
As the first home grant program ends, the following results will come in the housing market of Australia:
• There will be decrease in the supply of the houses and will reaches to the So as shown in the graph.
• The price for the same quantity of goods will increase.
• As we already assume the demand as inelastic, So will remain unchanged.
• There is no consumer surplus in this and will end as shown in the green region in the graph.
• The whole scenario “after the grant” (graph ii) will switch back to the scenario “before the grant” (graph i).
