Evaluate the case for the introduction of subsidies for agricultural produce. (15 marks)

Such action would bring both advantages and disadvantages, though on the whole it may be considered wiser to favour such action, depending on the individual context. Firstly, subsidies would allow supply to increase (shown on the supply and demand diagram by a shift to the right of the S curve), thus allowing a reduced price and thus, according to supply and demand theory, an increase in quantity demanded. Given the essential nature of agricultural produce for sustaining life, this demand curve would certainly be relatively price elastic in nature, thus leading to a total gain in revenue as a result of this demand increase. For producers, this greater revenue should mean an increased ability to invest in new capital as well as labour, which will also have positive externalities for the local community, as for example increased expenditure on workers will lead to a positive multiplier effect, as new employees spend in the local businesses and thus increase revenues in these stores. Moreover, the lower prices for agricultural produce will yield external benefits in wider society as the cost of living decreases, meaning more people can afford to eat foods they need for a healthy lifestyle and thus perhaps reducing strain on public institutions, such as healthcare. Most importantly, through these externality shifts, the subsidy would serve to remove market failure in the provision of agricultural produce by increasing supply and thus bringing the market equilibrium closer to the socially optimum equilibrium (show on diagram).

However, there are some risks associated with the provision of subsidies. Firstly, producers could become too dependent on their provision and thus overall productivity -- that is, output per unit of input -- will suffer and there will be rising costs of production. This could potentially mean that the increase in supply may not be as pronounced as expected and depicted above. Moreover, subsidies may encourage overproduction and thus food wastage. Worse still from the government's perspective, as seen on the subsidy diagram, there would be an increase in government expenditure and thus a worsening fiscal deficit, one which would perhaps come at the opportunity cost of spending in other areas (education, healthcare, etc) or would require budget cuts in other areas.