Government Intervention: Subsidies

Subsidies

Subsidies Definition

Used to increase production and consumption of those goods and services that have positive consequences for society.

Does it cause supply curve to shift to the right or left?

Causes supply curve to shift to the right

What does government do with revenue?

Government takes money from the sale of products with indirect taxes and gives it directly to the producers to subsidies the product

Is it positive or negative indirect tax?

Negative

Can the government offer subsidies to consumers?

Government can offer a direct subsidy to the consumers, which has the effect of boosting demand in a market.

What happens to consumers & producers if subsidies are provided?

subsidies given to producers: output increase, so supply shifts to the right
subsidies given to consumers: demand increases, so demand shifts to the right

Why do governments grant subsidies?

• Increase revenue and income of producers

• Make certain goods (necessities) affordable to low-income consumers

• Encourage production & consumption of particular goods and services that are believed to be desirable for consumers

• Support growth of particular industries in an economy

• Encourage exports of particular goods

• A method to improve allocation of resources by correcting positive externalities

Consequences of subsidies on consumers

Pay lower prices for the good or service

Consequences of subsidies on producers

Gain more revenue and income

Consequences of subsidies on workers

Gain more employment because producers need more labour to produce more output

Consequences of subsidies on society

society is worse off due to overallocation of resources, and higher prices received by producers protects relatively inefficient ones

Consequences of subsidies on government

government spends money, decreasing their revenue and resulting in expenditure

Subsidies Diagram

Producer surplus

area of trapezoid: P2, Pe, a, Qe

Consumer surplus

Area of trapezoid P1, Pe, b, Qe

Welfare Loss

area of triangle a, b, Qe

Flat Rate

per unit

Direct Aid

a fixed sum is paid to firms regardless of output and so there is no incentive to expand production