Production subsidies

Question 1

Definition of production subsidies

Answer 1

a subsidy is a payment made by government to producers of goods to encourage them to increase supply and so reduce price to consumers.

Question 2

Diagram production subsidies

Answer 2

Question 3

Diagram analysis of production subsidies

Answer 3

• costs of production are reduced.
• Causes the supply curve to shift rightwards
• price decreases
• quantity traded decreases
• solve problem of underconsumption/underproduction
• Reduce welfare loss
• vertical differences - size per unit
• Now socially efficient

Question 4

Advantages of production subsidies

Answer 4

• increase firms willingness to supply
• Make domestic firms more competitive
• Justified to have subsidy for merit goods
• Helps to keep prices down
• demand elastic = very effective

Question 5

disadvantages of production subsidies

Answer 5

• may not be passed onto the consumer
• demand may be price inelastic
• difficult to identify correct level
• reduce incentive
• still a price
• inefficient allocation