Government intervention - Subsidies

Subsidy

A subsidy is an amount of money paid by the government to a firm, per unit of outcome. It reduces the cost of prodcution

Reasons for subsidies:

1. To lower the price of essential goods to consumers, such as milk. The government hopes that consumption of the product will increase. 2. To guarentee the supply of products that the government thinks are necessary for the economy, such as basic food supply. It may be that the industry creates a lot of jobs that would be lost, thus causing economic and social problems. 3. To enable producers to compete with overseas trade, thus protecting the home industry.

Evaluation of granting subsidies:

The opportunity cost of the government spending on the subsidy in terms of other alternatives government spending projects. Wether the subsidy will allow firms to be inefficient. Do not compete fairly in a "free market" Although a subsidy allows consumers to buy products at a lower price, they may also be the taxpayers who are funding the subsidy. They are anti-competitive. The sales of foreign producers who are not receiving the subsidies from their government will be negatively affected. Can lead to the over-production of certain goods, such as agricultural goods, such a happens under CAP (Common agricultural Policy)