Micro 22 - subsidies

Question 1

what is definition of subsidies?

Answer 1

A sum of money grated to a firm to reduce cost of productions and increase production.

Question 2

what is the purpose of a subsidy?

Answer 2

increase production.

Question 3

what are some examples of subsidies given?

Answer 3

• clean energy.
• automotive sector.
• wages (furlough)
• healthcare.
• higher education.

Question 4

effect of subsidies on supply?

Answer 4

supply curve shifting to the right, as cost of productions have decreased.

Question 5

the effect of granting a subsidy on supply:

Answer 5

Question 6

how can the government correct market failure by granting a subsidy?

consumption externality.

depends on the size of the externality

Answer 6

If the government was to provide a grant on education, the mpc curve shifts to the right. This decreases private costs for the consumer because price has decreased. The free market level of output increase to the point QS. This reduces the externality because more people are going to school. The effectiveness of the subsidy depends on the size of the externality, so grant has to equal the size of the externality.

Question 7

problems with granting a subsidy:
- incurs an opportunity costs.

Answer 7

Because money spent on education can’t be spent on healthcare. therefore, if the government increases spending on education from E1 to E2, expenditure on healthcare will fall from H1 to H2, assuming ceteris paribus.
Eval:
depends on the size of the opportunity costs, it is likely that the government can raise taxes to provide healthcare. It could also spend less on other areas such as defence.

Question 8

problems with granting a subsidy:
- the effectiveness will depend on the elasticity of demand.

Answer 8

subsidies are more effective when demand is elastic because the change in quantity demanded is more than proportional to change in price. Grants are not effective when subsidy is small, because compared to the price, change is not much.

Question 9

what are the impact of subsidies on consumers?

Answer 9

• Decreased price- good.
• Increased consumption- good.
• increased purchasing power- good.
• Increased taxes- bad.

Question 10

what are the impact of subsidies on producers?

Answer 10

• decreased cost of production- good.
• increased profits- good.
• more investment- good.
• pay more taxes- bad.

Question 11

what are the impact of subsidies on the government?

Answer 11

• increased government spending.
• More tax revenue- good.
• Regional growth- good.
• Less funds for elsewhere- bad.
• Increased jobs- good.
• Increased productivity- good.