Chapter 4.4

Question 1

Why do governments grant subsidies?

Answer 1

To increase revenues of producers
To make certain goods affordable
To encourage production and consumption of particular goods and services
To support the growth of particular industries
To encourage exports of particular goods
To improve the allocation of resources

Question 2

Consequences of subsidies for stakeholders

Answer 2

Consumers gain
Producers gain
The government loses
Workers gain
Society loses
Foreign producers lose

Question 3

Which supply curve do you use when identifying producer surplus after granting a subsidy?

Answer 3

The initial pre-subsidy supply curve

Question 4

What does granting a subsidy do in terms of social welfare?

Answer 4

Increases producer and consumer surplus, but creates welfare loss because government spending on the subsidy