Econ 101: Subsidies and taxes aren’t paid by who you think

Our good friend Ronan Lyons from Trinity College Dublin is interviewed in an Irish article, titled “House price increases set to overtake grant offered by Help-to-Buy Scheme”:

The average price paid for residential property increased by €18,954 in the last 12 months, according to the latest Property Price Register.

The rising cost of buying a home has effectively almost wiped out the benefits of the Government’s Help-to-Buy Scheme, which gives first-time buyers up to €20,000 towards the cost of a property.

The average price paid for a house or apartment nationwide is now €256,193 – an increase of 8% when compared to the same time last year, but well short of the numbers though necessary to meet housing needs.

Well, this goes back to a basic principle of public economics: with an inelastic supply (and Ronan says Ireland needs roughly three times as many new homes to be built per year as is currently the case), a subsidy to buyers will lead to a price increase that could offset most of the impact of the subsidy. Simply said, that subsidy is likely a subsidy to homeowners, and not so much a subsidy to buyers. Now Econ 101 does not predict that (in partial equilibrium) the price increase caused by the subsidy will be higher than the amount of the subsidy, and there are other market forces at play here.

A good assignment for the applied economist is to compute the deadweight loss using estimates of housing supply and housing demand elasticities.

Link to the article.


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