subsidies

Question 1

meaning

Answer 1

provision of financial assistance to support firms / households by the government

Question 2

also means

Answer 2

price of good (MC) = original price - subsidies

Question 3

paid by

Answer 3

by government

Question 4

types of subsidies

Answer 4

specific (fixed amt charged per unit of output)

ad valorem (% of price per unit of output)

Question 5

what does subsidies do?

Answer 5

decreases firm’s MC

profit-maximising firms willing to supply the same units of output can decrease min price till the lower MC

Question 6

equilibrium price & qty

Answer 6

firms increase quantity supplied to capture marginal profit

surplus. Ep down, Eq right

Question 7

Efficiency (society’s economic welfare is maximised)

Answer 7

if market is already efficient(current lvl of output maximises society’s welfare), gov interventions to market confirm will lead to loss of economic welfare. indirect subsidies distort price signals and lead to loss of allocative efficency

Question 8

PES

Answer 8

magnitude of p and q change (effectiveness):
elastic = higher

inelastic = lower

Question 9

PED

Answer 9

elastic = encourage consumption (dp < iq)

inelastic = lower final price of good (usually necessity cuz it is inelastic good) (dp > iq)

Question 10

Certainty in outcome

Answer 10

depends on PED & PES

Question 11

Feasility / Effect on gov budget

Answer 11

gov need to buy what has been subsidised - budget deficit

Question 12

Equity (equal sharing, exact distribution and division)

Answer 12

indirect subsidies = PROGRESSIVE EFFECT cuz suppliers can charge consumers at a lower price (usually for essential products ane necessitivies) so more low income ppl can afford em (cuz poor ppl spend a larger percentage of their incomes on these stuff) = better ability to pay and not drop out of the market = greater purchasing power for poor than rich, improving equity cuz more ppl can enjoy these goods & services

exception: subsiding goods that benefit more rich than poor (regressive effect)

Question 13

Who bears the cost / burden??

Answer 13

gov spending on subsidies = worsening gov budget position

opp cost of subsidy: if gov keep on spending on one industry, then need to reduce expense /increase taxes for other areas. but increasing taxes means more problems (unemployement, less investment…)

this means for optimal allocation of funds, gov need balance marginal social benefit and marignal social cost

ONCE IT IS GIVEN, IT IS OFTEN DIFFICULT TO REMOVE