Subsidy

Subsidy

A money grant given to firms to reduce the costs of production and encourage an increase in output

1. Supply curve shifts to the right from S1 to S1+sub

2. Price reduces from p1 to p2 and quantity increases from q1 to q2

3. Gov cost- p2bcd

4. Producer rev- q2dc0

5. DWL- abc

Effects on the 3 economic agents

Consumers- They benefit but also don’t benefit

Producers- Benefit from subsidy

Government- Benefit but also don’t

This is because the subsidy causes a decrease in price so consumers have a lower price and a higher choice and producers benefit due to the increased sales and also the government

Evaluation

However this is based on the assumption the firm uses the subsidy to increases output as this might not be the case. The firm can use this to pay of debts or pay workers higher wages etc keeping price the same and quantity leading to government failure