Subsidies Eco opt2

What is a subsidy?

• Direct payments made by Producers to the Consumers

• Direct payments made by Government to the Producers

• Direct payments made by Government to the Consumers

• Direct payments made by Government to the Stakeholders

Why does the government give subsidies?

• To reduce negative externalities in a market

• To increase consumption of merit goods

• To increase the interest rate

• To reduce travel costs

Which 2 of the following are advantages of subsidies?

• Reduces the price of raw materials

• Reduces producer's cost of production

• Increases production/output

• Increases consumer's income

The government grants subsidy to producers. What are the 2 effects of this?

• Price changes from P1-P

• Quantity changes from Q-Q1

• Quantity changes from Q1-Q

• Price changes from P-P1

When PED<1,a subsidy will reduce cost of production AND prices which will result in...a 1._________ percentage change in 2.________

• 1.Greater, 2.Price

• 1.Lower, 2.Demand

• 1.Greater, 2.Demand

• 1.Lower, 2.Price

One effect of the subsidy is to increase:

• Market Failure

• Consumer surplus

• Tax revenue

• Producer surplus