Subsidies

Disadvantages of subsidies are:

-Firms may become less efficient in production if they rely on subsidies -Opportunity cost to government of spending on the subsidy. Money could be spent on other things. -Some goods seen to have external benefits, e.g. wind power may be less reliable than fossil fuel

Advantages of subsidies are:

-They increase supply and reduce price, therefore, encouraging production/consumption -Lower production costs for firms -They 'internalise the externality'

Examples of subsidies are

Subsidies to wind farms Or to bus/train companies to increase the number of services, Biofuels, alternative power, banking industries

The main aims of government subsidies are to

To keep market prices down, To increase consumption of merit goods and services, To maintain or increase the revenues of producers, To protect industries from low cost international competition, To protect employment in unstable markets

Consumer subsidies are payments to consumers to

allow them to purchase more of a good or service. This affects the level of demand instead of supply.

Producer benefit when PED is

elastic

Consumers benefit when PED is

inelastic

The consumers receive the

lower price (Pc in the diagram)

Good example of a subsidy is the electric cars in Oslo, where the government has

put no taxes on electric cars and hat they can ride in bus lanes to increase consumption for them

Producer subsidies are payments to producers by the government which

reduces the costs of production and encourages suppliers to increase output. Shifting supply curve

A producer subsidy will affect the supply curve by

shifting it to the right (expand)

The effect of a subsidy is to move the

supply curve to the right from S1 to S2. This reduces price and increases output

With subsidies the producer receives the

top price (Pp in diagram)

The subsidy is the same as

unit tax - gap between supply