Supply, Demand and Elasticity Subsidies

Supply, Demand and Elasticity

Subsidies for rain water tanks: Supply and demand

One of the problems with marketing energy-efficient technology is that consumers tend to prioritize cheapness or style over the 'greenness' of a purchase. When the grocery budget is tight, consumers will not necessarily buy ethically-raised meat that leaves less of a carbon footprint upon the planet. When there is an economic boom, consumers may be more attracted to expensive and flashier products, as Americans bought environmentally unsound, gas-guzzling SUVs during the 1990s and mid-2000s. Only when an environmentally-friendly product is affordable and when it is in the consumer's self-interest to purchase the item will the average consumer buy products like a decidedly 'unsexy' eco-friendly rain barrel to conserve rain water.

According to the competitive market model of supply and demand, as demand increases, price increases. Currently, rain water tanks are relatively expensive, at least in the eyes of consumers who do not regard them as a necessity. Thus, their price remains high, given that producers must charge a large amount of money to cover the costs of production. Producers also keep the numbers of rain barrels produced relatively low, given the low level demand, which also keeps prices high. Producers must charge high prices because they cannot operate on economies of scale.

As prices of rain water tanks are high, there remains disincentive to purchase the products. As they do not seem like a 'must have item' from the point-of-view of homeowners, a kind of vicious cycle of low demand, low production numbers, high cost, and low levels of social acceptance is perpetuated. "The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good…. Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue" (Economics basics: Demand and supply, Investopedia. 2010).

By subsidizing the product, the government hopes to encourage more individuals to buy rain water tanks. A subsidy makes the cost of the item cheaper for consumers and reduces or eliminates the opportunity cost of purchasing the item. Users of the rain water tanks can save the environment without unduly taxing their wallets. As demand goes up, supply will increase, as suppliers have an incentive to produce more tanks. They may also charge more money for the barrels, given the rise in demand, but the government subsidy will mitigate, to some degree, the negative impact of the rise in price.

Price elasticity relates to the degree which a good or service is perceived as a necessity, and the availability of substitutions. Price elasticity for this product was likely quite great, before the item was subsidized, as few consumers perceived it as a necessity. Only the costs of production limited the price elasticity, as the tanks are presumably not cheap to build. Of course, the government might protest that the product is a necessity, given the dire need for conservation, if Australia is to continue to have a sustainable source of drinking water. But preserving the environment is often a case where the micro interests of the household do not match up with the macro interests of the nation. Until the subsidy was created, a household in the short-term could save money by not purchasing the rain water tank, although in the long run the household may save both on water bills and also upon more costly solutions needed by the government, to ensure that the nation has a sustainable source of water, if conservation is not instated.

Rain water tanks are not a perfectly elastic good, given that there are few substitutions an ecologically-friendly consumer can use in their place. "A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life" (Economics basics: Elasticity, Investopedia. 2010). Perfectly elastic goods are goods and services such as potato crisps or apples, for which a variety of substitutions exists. If the price of one brand of snack food goes up, it is easy to shift one's buying habits and purchase the other variety. In the case of this particular product, the substitute good is simply not purchasing the rain tank at all.