subsidies

Subsidy

A subsidy refers to assistance by the government to individuals or groups of individuals, such as firms, consumers, industries or sectors of an economy. Subsidies may take the form of direct cash payments or other forms of assistance such as low-interest or interest-free loans, the provision of goods and services by the government at below-market prices;tax relief;and others.

Why do governments grant subsidies

• Subsidies can be used to increase revenues (and hence incomes) of producers. —> governments support income/revenue of those producers.

• Subsidies can be used to make certain goods affordable to low-income consumers. —> subsidies lower the price paid by consumers, making the good more affordable.

• subsidies can be used to encourage production and consumption of particular goods and services.

• Subsidies can be used to support the growth of certain industries in an economy.

• subsidies can be used to encourage exports of particular goods —> since subsidies lower the price paid by consumers, they are sometimes granted on gods that are exported.

• Subsidies are a way to improve allocation of resources by correcting positive externalities. —> in cases of positive externalities, subsidies may be used to improve allocative efficiency.

market outcomes due to the subsidy

• increased equilibrium quantity

• equilibrium price falls (for consumers)

• price received by producers increases

• there is an overallocation of resources to produce the good : Qsb is greater than the free market quantity.

consequences of subsidies for various stakeholders

• Consumers —> affected by the fall in price of the good, and the increase in quantity purchased. This is a positive change.

• Producers —> producers are also better off, because they receive a higher price and produce a larger quantity. This leads to increased revenues too.

• The government —> they pay for the subsidy, which is a burden on their budget. To obtain the revenues for the subsidy, the government may have to reduce expenditures elsewhere in the economy, or it may have to raise taxes.

• Workers —> firms will hire more workers.

• society—> is worse off because there is an overallocation of resources to the production of the good. n