Question

In: Economics

Consider an economy where many farmers rear pigs to earn a living. Recently there is an...

Consider an economy where many farmers rear pigs to earn a living. Recently there is an outbreak of pig virus and consumers are concerned about consuming pork. As such the sales of pork in the economy decreases sharply, resulting in a severe drop in the income for pig farmers. The government would like to take action to increase the consumption of pork to help the pig farmers and it is contemplating two options. One is to provide a subsidy to pig farmer and the other is to try to influence consumer tastes through an advertising campaign to highlight that pork is safe to consume.


Assume that both options result in the same magnitude of shift in the demand or supply curve, respectively. You are also given the information that the demand for pork is relatively price inelastic and the supply of pork is relatively price elastic. Examine the outcomes under the two options and explain which option is more effective in increasing the consumption of pork. Demonstrate your answers with a relevant pork market diagram.

Solutions

Expert Solution

There is a decrease in the sales of the pigs due to the consumer's concern about the outbreak of the pigs virus. There is loss of revenue to farmers and hence government proposes two plans -

First is to provide the subsidy to the farmers, which can compensate the revenue loss but can't increase the demand at ince, it will increase slowly as consumers feel now it is safe to eat pork.

But if the government follows the plan of promoting awareness and changing taste of the consumers through advertising campaign, the consumers will know that the pork consumption is safe and hence the demand we be restored to the previous level in short period of time, this is also because the demand in inelastic in nature.

So according to me the advertising campaign will be more effective in increasing the consumption of pork. This can be shown graphically as -


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