Government Subsidies And Failure

Question 1

Subsidies

Answer 1

Government support offered to producers and consumers to encourage production/consumption and reduce the market price

Question 2

Subsidy examples (3)

Answer 2

Solar panel’s
Child care
Public transport

Question 3

Justification for subsidies (5)

Answer 3

• Helps the poor
• Increased output of positive externalities
• Protects jobs through a recession
• Healthcare treatments are easier
• Reduce cost of training

Question 4

Evaluate effectiveness of subsidies

Answer 4

It stimulates demand but elasticity dictates by how much, but other incentives may been needed to encourage production/consumption

Question 5

Evaluate the efficiency of Subsidies

Answer 5

Investment and research can bring positive externalities but firms could be dependent on the government

Question 6

Evaluate: Subsidies cost and benefit

Answer 6

• It could be self financing via Tax revenue
• Could it create an extra burden in consumers

Question 7

Do subsides correct market failure? (Example of free child care)

Answer 7

Providing free child care could incentivise work but it could lead to unintended consequences such as the subsidy not working and people don’t go to work and the government wasting their money

Question 8

Government failure

Answer 8

When governments attempt to correct MF but the intervention exacerbates the MF or creates a new MF

Question 9

Examples of government failure (4)

Answer 9

• Smoking ban indoors: increasing litter
• Landfill tax: fly-tipping
• Alcohol min prices: Home brews
• Widen motorways to decrease congestion: more people use the roads

Question 10

Causes of Government failure (6)

Answer 10

Cost outweigh benefits
Regulatory capture
Information failure
Political self interest
Policy myopia
Law of unintended consequences