theme 4 : subsidy removal

what is a subsidy

a per unit payment to a firm from a gov to increase production

how could a subsidy lead to economic growth

• the more a firm produces the more they get given so a firm with a subsidy would be able to increase supply

• production and workers which increases the multiplier and therefore increases GDP

name a country that cut subsides

• Zambia

• argues to be of a great benefit to the economy

• creates a more stabilised economy can shift the focus to activities like crop research which would help grow the agricultural sector

3 arguments for cutting subsides

• subsides can be wasted

• subsidies are a disincentive to innovate

• opportunity cost

wasted subsides explanation

• money can be blown on wasteful projects

• businesses don’t feel as obliged to be careful with spending

disincentive to innovate explanation

• if govs keep bailing out businesses by covering costs etc businesses don’t need to find new ways of increasing revenue and / or making cost savings in production

• removing this safety inspires productivity

opportunity cost explanation

• burden of budgets

• could be allocated elsewhere

• e.g. healthcare, education, infrastructure