Supply, Demand and Elasticity Subsidies Research Proposal

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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.

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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.

Through subsidizing more expensive but environmentally-friendly products, the government ensure that everyone 'wins.' The citizen wins over the long-term, given that he or she is entitled to a better quality of life, with drinkable water. The government, although it must use some of its funds in the short run, wins by ensuring that it does not have to instate costly water-conservation policies later on during in the far or near future. The producers of these environmentally-friendly products will see a spike in demand, as more individuals purchase these items, and demand also increases as the rain water tanks as seen a necessity, rather than an extraneous 'fringe' environmentally-sound product. Ideally, rain barrels will become seen as a necessary item rather than a luxury as a result of this subsidy program.

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