Market Failure And Government Intervention

Question 1

Advantages of a subsidy?

Answer 1

Negative externalities have been reduced

Incentive to increase supply of merit goods

Question 2

What are the disadvantage of a subsidy

Answer 2

Difficult to decide quantity of the subsidy

Producers may lose the incentive to be efficient and reduce costs

May not be effective against inelastic goods

May not pass Saving onto consumer, firms may keep money to balance books etc

Question 3

What is a subsidy and why is it used

Answer 3

Direct payment made by government to produce a good or service– done to encourage production of merit goods