1.2.9 Subsidies

Question 1

Define Subsidy

Answer 1

. A grant offered to producers and consumers which lowers the price of a good to encourage production or consumption of a good

Question 2

Examples of Subsidies

Answer 2

. Solar Panel
. Child care for working families
. Wind Farm Investment
. Food 
. Fuel

Question 3

Justifications for Subsidies for Producer

Answer 3

. Helps poorer families e.g. food and child care cost

. Reduces cost of training and employing workers so more workers may be employed

. Protects jobs in loss making industries e.g. hit by recession

. Achieves a more equitable income distribution

. Encourages output and investment in struggling sectors e.g. Wind Farm Investment

Question 4

When will there be a larger change in price than change in quantity after a subsidy?

Answer 4

Demand is inelastic

OR

Supply is elastic

Question 5

When will there be a larger change in quantity demanded than change in quantity after a subsidy?

Answer 5

Demand is elastic

OR

Supply is inelastic

Question 6

Evaluation Arguments when assessing Subsidies

Answer 6

. Is the subsidy sufficient to achieve enough demand or consumption

. Will the subsidy create more tax revenue or will it be an extra burden for tax payers? Will the government have to raise tax revenue to create subsidy? Will there lead to less aggregate demand in the short run?

. Does the subsidy lead to unintended consequences (negative externalities)?