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by future1979
3193 days ago
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Err ... not according to Econ 101. A rational producer in a perfectly competitive market supplies just enough to clear the market. When people distort markets with subsidies, etc. the amount produced is more. This can also be in industries with barriers to entry as a large producer might supply more on purpose to drive existing competitors out of business. |
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Also, this is an unfortunate misinterpretation of even econ 101. Econ 101 says that there is not a fixed demand for most goods. Demand (and supply) have elasticity, which is a measure of their responsiveness to price changes. A rational producer with perfect information does not "clear the market" if that means "supply enough to meet all demand for the good." (If that's not what it means, I really don't know what it does mean.) They supply just to the point where marginal cost of production is equal to the price the next consumer is willing to pay.
And, subsidies are not definitionally distortionary. Sometimes they can be used to correct uncaptured positive externalities.