Subsidies Flashcards
What is a subsidy
A grant given to firms by the government to encourage an increase in the production of a particular good/service
What is a subsidy
A grant given to firms by the government aimed to increase the production or consumption of a particular good/service
Go on sketchpad and draw the effects of a subsidy on a supply and demand curve
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
Advantages of subsidies
-increase consumption of merit goods
-reduce costs of production for firms
-encouragement of positive externalities
Advantages:
Encourages positive behavior or investment: Subsidies can promote socially beneficial behavior or investment, such as encouraging firms to invest in renewable energy or helping lower-income households access healthcare or education.
Supports emerging industries: Subsidies can help nascent industries (e.g., electric cars, clean energy) become competitive, facilitating innovation and long-term growth.
Market stability: Subsidies can stabilize markets in times of crisis, such as providing financial aid to farmers during droughts or other natural disasters.
Disadvantages of subsidies
-difficult to calculate
-could be consumed by producers
-opportunity cost
-costly for the govt
Disadvantages:
Market distortion: Subsidies can distort market signals, leading to overproduction or inefficient allocation of resources (e.g., overproduction of subsidized goods).
High fiscal burden: Subsidies require government spending, which can lead to large fiscal deficits or a misallocation of resources away from other areas.
Dependency: Over time, industries or consumers may become dependent on subsidies, reducing incentives for efficiency or innovation.
