Subsidy - Full Market Impact

Question 1

What is a subsidy ?

Answer 1

A money grant from the GOVT to reduce the costs of production and encourage an increase in output

Question 2

Why are the implemented from a GOVT standpoint ?

Answer 2

Solve Market Failures
Increase affordability

Question 3

What is the impact of subsidies using a diagram ?

Answer 3

Supply shifts to the right S1-S2
Price falls from P1-P2
Quantity increases Q1-Q2

Question 4

How do we find GOVT cost of a subisdy on a diagram ?

Answer 4

P2BCD

Question 5

How do we find Producer revenue on a diagram ?

Answer 5

P1AQ10 , DCQ20

Question 6

How do you find consumer saving on a subsidy diagram ?

Answer 6

P1P2AE

Question 7

Where do you find deadweight loss on a subisdy diagram ?

Answer 7

ABC

Question 8

How do consumers react to subsidies ?

Answer 8

:) due to lower prices and increased quantity/choice

More affordable for poor people

However to they may see higher taxes as the GOVT has to fund the subsidy via higher taxes or spending cuts

Question 9

How do producers react to subsidies ?

Answer 9

:) as they receive larger producer revenues and greater producer surpluses

Workers happier if subsidy used to hire more people or help them out

Question 10

How does the GOVT react to the subsidies ?

Answer 10

:) if aims are achieved

:( due to the cost of it and long run funding - also are the producers using to subsidy as intended or are they wasting it on bonuses etc

Don’t want the producers to become more dependant which reduces efficiency when subsidy goes