Subsidy

Question 1

How do you draw a subsidy diagram?

Answer 1

• label the x-axis as quantity
• label the y-axis as price
• Draw a demand curve pointing downwards
• Draw a supply curve pointing upwards
• draw another one pointing down labelled s1+sub

Question 2

Explain what happens in the diagram?

Answer 2

subsidy reduces the cost of production for producers so it will shift the supply curve downwards from s1 to s1+sub
-Gov-subsidy will cost the gov and this is seen p2de
-producers, it’s beneficial before the subsidy they were producing at p1aq1o after the subsidy they are producing at edq2o.
Consumers can buy products at a lower cost p1p2ac-saving and the extra payment is going to the producer at q1q2cb.

Question 3

What can be evaluation points for subsidy?

Answer 3

Is the government using the subsidy efficiently- OC

• Could the money go to education and training schemes
• improving infrastructure
• welfare spending- has it been borrowed will future taxes be more expensive