4.1.8.9 Subsidies NOTES

What is a subsidy?

• A financial penalty for businesses

• A type of government regulation on products

• An amount of money given directly to firms by the government to encourage production and consumption

• A tax imposed on goods

What is the effect of a specific per unit subsidy on the supply curve?

• Shifts the supply curve vertically downwards

• No effect on the supply curve

• Shifts the demand curve vertically downwards

• Shifts the supply curve vertically upwards

Which of the following is an example of a producer subsidy?

• A guaranteed minimum price offered to farmers

• A subsidy on consumer electronics

• A tax rebate for consumers

• A consumer discount on products

What does the economic incidence of a subsidy indicate?

• The government's role in the subsidy

• The legal requirement of the subsidy

• Who is made better off by the subsidy

• The total cost of the subsidy

What happens to the price the consumer pays when a subsidy is introduced?

• Does not fall by the full amount of the subsidy

• Increases by the full amount of the subsidy

• Falls by the full amount of the subsidy

• Does not change

What is the main goal of providing subsidies for merit goods?

• To decrease consumption

• To increase government revenue

• To impose more regulations

• To encourage consumption by making goods cheaper

What could be a potential problem with government subsidies?

• They encourage efficiency

• They may lead to firms relying on subsidies rather than improving efficiency

• They reduce government spending

• They decrease taxation

How does the elasticity of demand affect the incidence of a subsidy?

• No effect on the incidence of subsidy

• More inelastic the demand, greater the benefit for producers

• More elastic the demand, greater the benefit for consumers

• More inelastic the demand, greater the benefit for consumers

What is a common use of subsidies in the context of public transport?

• To encourage people to drive more

• To encourage people to use public transport and reduce negative externalities

• To increase the price of public transport

• To discourage the use of public transport

What happens if the government overzealously increases subsidies?

• It leads to optimal market efficiency

• It has no effect on market dynamics

• It reduces government expenditure

• It can lead to inefficiencies and overproduction