# How do free goods change the equilibrium price?

In a single good market, what happens to the equilibrium price if a supplier decides to give out some of their goods for free? (assuming total production remains the same)

My reasoning:

Either the goods are given to a consumer who's been priced out of the market, therefore the supply to the market decreases while the demand stays the same, and the equilibrium price increases.

Otherwise, the goods go to a consumer who's in the market, supply and demand decrease by the same amount and the equilibrium price doesn't change.

How can giving out stuff for free not decrease the market price? Isn't this counterintuitive?

EDIT: to clarify, I'm considering a market where the total quantity of goods available is fixed

Some examples are:

• an agricultural commodity after the harvest and until the next, everyone is selling out of inventory
• shares in a company
• collector items
• also, in the short time, any industry where everybody is already producing at maximum capacity and putting more capacity in line requires some time (eg. nuclear plants?)

[I thought up this problem considering the implications of the recent (as of Aug 2023) announcement by Russia that it was going to give out some of its grain for free to some of the poorest countries]

## Response to original question

It depends on parameters that you assume there might be no effect or some effect.

Market price is given such that $$S(p)=D(p)$$, supplying 3 extra units of good for free to the market is tantamount to $$S(p)+3= D(p)$$. Depending on parameters of these functions price might change or it might not. For example, if you assume perfectly elastic demand such that $$D(p) = \begin{cases} 0 & \text{ if } p> p^* \\ \infty & \text{ if } p \leq p^* \\ \end{cases}$$ then market price $$p^*$$ won't change.

There are also different ways how you could model the interaction above aside from simple supply & demand model. You could model it as a dynamic problem for example with one time free trial of the good for some lucky consumers.

Ultimately you did not provided enough details and constraints to arrive at some specific result, depending on how you frame the problem and parameters price might change or it might not.

## Response to Edit

Virtually all of the above applies. You specified that $$S(p)$$ is some constant function e.g. $$S(p) = x$$. But unfortunately this is still not enough info to give precise answer.

For example, take your company stock example. If company simply issues 40 stocks that market, based on their expectations of stock performance markets expect the correct price of stock is \$50. Since the firm is only small part of whole market the market demand can viewed as perfectly elastic demand from previous section. So in this case even if company decides to award 20 stock or 39 stocks for free to owner and just sell 20 or 1 stock price is still \$50. However, suppose we alter the situation such that it is not new company and some other investors shorted the stock of a company and there is short squeeze (like what happened to GameStop stock couple years ago). In such case the decision to give some stock to some people for free would affect the price depending on who was given the stock for free.

Similar explanations could be made for all other cases you mention. Simply still anything could happen (to price) without further parameters.

You say your question is motivated by the free grain donation, so lets focus on that. I won't address that rigorously because it is too much research to get all the necessarily details. However, loosely speaking, it would depend on how big that donation is. World grain market is very close to perfect competition because grain is homogenous, there are many producers and even though some countries are acting as blocks (e.g. EU), giving them some degree of market power, there are even many such block around the world. In such market typically producers cant affect prices by cutting production or expanding it unless the whole supply shifts (i.e. production expands/is cut at any price) However, Russia, according to reports, accounts for 11% of world wheat production and 19% of world wheat exports. If they would decide to donate all those exports for free it would probably affect the price at least in short-run because it is 20% of world market. But I am pretty sure they do not plan to do that. If they do 0.001% as a token donation it will have no effect.

• I changed the text of the question to clarify Commented Aug 3, 2023 at 5:14