Subsidies

Question 1

What is a subsidy

Answer 1

A grant given to firms by the government to encourage an increase in the production of a particular good/service

Question 2

What is a subsidy

Answer 2

A grant given to firms by the government aimed to increase the production or consumption of a particular good/service

Question 3

Go on sketchpad and draw the effects of a subsidy on a supply and demand curve

Answer 3

Did you remember:
1.Arrows to show shifts in price, equilibrium quantity and supply curves
2.Consumer benefit on the bottom
3.Producer benefit on the top
4.Benefits separated by line which begins at original equilibrium
5.Shift outwards
6.Show the size of the subsidy with arrows
7. Middle triangle is deadweight welfare loss

Question 4

Advantages of subsidies

Answer 4

-increase consumption of merit goods
-reduce costs of production for firms
-encouragement of positive externalities

Question 5

Disadvantages of subsidies

Answer 5

-difficult to calculate
-could be consumed by producers
-opportunity cost
-costly for the govt