Th4.3: MOS - Removal of Government Subsidies

Question 1

What items are subsidies placed on and why?

Answer 1

essential items within a country, such as food or fuel, or target agriculture and industry in an attempt to increase output and investment

Question 2

How are subsidies good?

Answer 2

they can be an effective way of minimising absolute poverty and ensuring a minimum standard of living

Question 3

What are the five problems with subsidies?

Answer 3

poorly targeted 
inefficiency 
large amount of government spending
corruption
politically unpopular

Question 4

Poorly targeted

Answer 4

often poorly targeted since subsidies on basic goods like rice will benefit everyone, not just the poor - economic theory suggests this would be solved by giving the poor cash payments as they are then targeted

Question 5

Inefficiency

Answer 5

tend to lead to inefficiency and, over a long period of time can become ineffective in increasing development

Question 6

Large amounts of government spending

Answer 6

they represent a large amount of government spending, incurring an opportunity cost and often leading to high levels of debt

Question 7

Corruption

Answer 7

they can also cause problems in terms of corruption and criminality

Question 8

Politically unpopular

Answer 8

removing a subsidy can be very politically unpopular and some governments have even been thrown out because of it - best time to remove is when free market is falling as then less noticeable