Subsidies

Question 1

What are subsidies

Answer 1

assistance in the form of direct or indirect payments from governments to firms

Question 2

how do subsidies affect the allocation of resources

Answer 2

increase production
lowers price
increase quantity demanded

Question 3

why the government grants subsidies

Answer 3

1. help firms increase revenue
2. make goods affordable to low-income earners
3. encourage the production of particular goods considered desirable/sustainable
4. increase output = increase growth
5. encourage exports by decreasing price

Question 4

consequences for consumers

Answer 4

• lower price + increased quantity

Question 5

consequences for producers

Answer 5

• receive a higher price after the subsidy and produce a larger quantity = increased revenue

Question 6

consequences for governments

Answer 6

negative impact on government’s budget as they have to pay for the subsidy

*have to reduce expenditures of increase taxes

Question 7

consequences for workers

Answer 7

increased employment opportunities due to increased output

Question 8

consequences for society

Answer 8

allocative inefficiency as MC > MB
- there is an overallocation of resources
- government spending on the subsidy is greater than the gain in consumer and producer surplus, therefore there is welfare loss