3.2.2 Subsides

Question 1

Meaning of subsidies

Answer 1

Assistance by the government to individuals or groups of individuals

Question 2

Reason for subsidies

Answer 2

1. Used to increase revenues of producer
2. Make certain goods more affordable to low income consumers
3. Encourage production and consumption of particular goods and services
4. Support growth of particular industries
5. Encourage exports of particular goods

Question 3

What happens after subsidy

Answer 3

1. Gain in producer surplus
2. Gain in consumer surplus
3. Loss in government expenditure

    ( Need to refer to graph in notes)

Question 4

Advantages of Subsidies

Answer 4

1. Subsidies can change preferences, as more consumer will.consume them
2. Support domestic industry
3. Benefits of goods with positive externalities is internalised (increase usage)

Question 5

Disadvantages

Answer 5

1. Subsidies make producers inefficient and reliant on subsidies
2. Effectiveness of subsidies cdepends on elasticity of demand
3. Subsidies has opportunity cost

Question 6

Effects towards consumers and producers after subsidies

Answer 6

1. Elastic demand/Inelastic supply
   - Consumers enjoy a smaller share of the subsidy
   - Producer enjoys a bigger share of the subsidy
2. Inelastic demand/Elastic supply
   - Consumers enjoy a larger share of the subsidy
   - Producers enjoy a smaller proportion of the subsidy