Subsidies

Subsidy Definition

A subsidy is a payment made to a firm or individual, made by the government for the purpose of increasing the purchase or supply of a specific good.

Consequences of Subsidies: The Producers

Producers are better off as their revenue has increased as the quantity available in the market has increased and costs of production have decreased.

Impact on Allocation of Resources

-They affect the allocation of resources because they affect relative prices, thus changing the signals and incentives prices convey. - It lowers costs of production for a firm so firms produce more at each cost and supply shifts downwards. -The subsidy makes the price received by the producers higher too and thats another reason the curve shifts downwards. -This causes greater consumption and production of the good.

Consequences of Subsidies: The Consumers

Consumers are better off as the subsidy decreases the price of a good and increases its quantity available in the market.

Reasons Governments Subsidise - Socially Beneficial Products

Governments grant subsidies to encourage the consumption and production of socially beneficial goods such as vaccinations.

Reasons Governments Subsidise - Support Industries

Governments grant subsidies to support a producer or industry by lower their production costs and increasing their revenue.

Reasons Governments Subsidise - Balance of Payments Deficit

If the imports of a country exceed the exports, the government may provide subsidies to make goods cheaper to overseas markets.

Consequences of Subsidies: Society

Society is worse off as there is an overallocation of resources to the production of the good. Qsb>Q*

Specific Subsidy

Subsidy is a fixed amount per unit of output.

Consequences of Subsidies: The Government

The govt. is worse off because their budget is negatively impacted. Additionally, they may have to reduce expenditure in other areas (opportunity cost).

Consequences of Subsidies: The Workers

Workers are better off as the increase in output increases the demand for workers and so employment rises.