The Making of Cultural Policy: A European Perspective

27

If culture takes up a lot of time of the consumer and producers have received volume subsidies to stage a
certain number of productions, both the price elasticity of market demand and supply are likely to be low.
As a result, welfare costs are high. Welfare gains from the demand price subsidy, measured by consumer
and producer surpluses, must be balanced against the welfare costs of raising tax revenues. Figure 1c
indicates that boosting supply through, for example, tax incentives for producing films lowers prices and
raises volume. In principle, there is no difference in using demand or supply price subsidies in
competitive environments. If demand is very inelastic and supply very elastic, most of the benefit of the
supply price subsidy is shifted to consumers while demand is not boosted very much. In that case, there is
not much point in supply price subsidies. Although most cultural tax incentives apply across the board, it
makes sense to avoid dead-weight losses by trying to target these instruments at the most needy projects.
For example, interest-free loans only apply to living visual artists; film incentives require films to have
substantial European contents; and deductions for monuments can only be obtained if the property is
indeed a valuable, historic monument.

Third, a subsidy to boost the volume of supply yields lower prices and bigger volume. The positive
effect on volume is partially offset by the negative effect of lower prices on supply, particularly if the
demand elasticity is small and the supply elasticity is large.

5.2 Dead-weight losses and substitution

When giving subsidies, efficiency requires one to avoid dead-weight losses and substitution. This means
that ideally one subsidises only the marginal buyer or seller but in practice one has to subsidise all other
buyers and sellers as well (unless one can target the subsidy to the most needy). For example, if one
wants to help low incomes with cheap opera tickets, one also gives unnecessary subsidies to those
pundits who can afford the true cost of opera. The welfare losses from these unnecessary subsidies
(measured by the consumer and producer surplus triangles) are higher if demand and supply are more
inelastic. One should avoid substitution, so cultural producers should not receive subsidies for activities
they would have done anyway without subsidy.

Demand price and supply price subsidies are equivalent. They are across the board subsidies and
suffer from dead-weight losses. Supply volume subsidies can be much better targeted at particular needy
cultural activities and thus cause less dead-weight losses. However, supply volume subsidies are allocated
by civil servants, committees of experts or others, which cause inefficiencies associated with lobbying
and rent seeking. The use of committees of experts may also induce a bias for arts for artists and arts for
the elite, but the extremes of the cultural spectre may benefit. Some therefore have a preference for
demand subsidies or generic rules that lean with the market. This allows the government to change from
participant to setting the rules and conditions of the game and ensuring a level playing field among

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