Understanding Subsidies

Front

What is a subsidy?

Back

Government assistance to individuals or groups, including firms and consumers.

Front

What are the types of subsidies?

Back

1. Direct cash payments 2. Low-interest or interest-free loans 3. Provision of goods/services at below-market prices 4. Tax relief

Front

How do subsidies affect resource allocation?

Back

They change resource allocation by affecting relative prices, increasing producer revenue and lowering consumer prices.

Front

What factors determine whether subsidies improve or worsen resource allocation?

Back

It depends on market efficiency prior to the subsidy.

Front

What are some reasons for granting subsidies?

Back

1. Increase revenues for producers 2. Make essential goods affordable for low-income consumers 3. Encourage production/consumption of desirable goods 4. Support growth in particular industries 5. Encourage exports by lowering prices 6. Correct positive externalities to improve allocative efficiency.

Front

What happens to the demand and supply curves when a subsidy is granted?

Back

The supply curve shifts downward, leading to a new equilibrium.

Front

What is the effect of a subsidy on the price paid by consumers and the price received by producers?

Back

Price paid by consumers (Pc) falls, and price received by producers (Pp) increases.

Front

What is the formula for calculating government spending on subsidies?

Back

(Pp - Pc) × Qsb.

Front

What are the consequences of subsidies for consumers?

Back

Consumers are better off due to lower prices and increased quantity purchased.

Front

What are the consequences of subsidies for producers?

Back

Producers are better off due to higher prices and increased revenue.