Theme 1.4 - Subsidy Flashcards
1
Q
What is a subsidy?
A
Financial assistance from state to firm
2
Q
Why are subsidies usually allocated?
A
Reward firms for producing merit goods
Encourage prod + cons of merit goods
3
Q
What are the benefits of subsidising firms?
A
Reduces prices + increases quantity
Incentivises increased prod + cons of merit goods
Changes firm preference over time (More +ive ext.)
4
Q
What are the drawbacks of subsidising firms?
A
Carries opportunity cost
Tough to estimate extent of +ext. + therefore subsidy
Information gaps may lead to inaccurate subsidy
Firms may become reliant + inefficient
5
Q
How does a subsidy aim to help its recipient firm?
A
Maintain low production + unit costs
