Subsides

Question 1

Define subsides

Answer 1

Sum of money given by the government in order to encourage the production of a good or service

Question 2

What does a subside work for ?

Answer 2

Merit goods and positive externalities

Question 3

Evaluative points of subsidy

Answer 3

Risk of government failure

May not use subsidy to increase production failure or may become productively inefficient

Real resource opportunity cost

Subject to corruption

Question 4

How a subsidy works

Answer 4

Subsidy will increase firms cost of production and mean that at any given price suppliers will be able to earn more profit

Meaning they will have more incentive to supply and supply curve shifts right (s1-s2)

Decreasing equilibrium price from (p1-p2)

Extension of demand (q1-q2)

Increasing the quantity to the social optimum correcting problem of underconsumption or underproduction and market failure