2. Subsidies

a) purpose of intervention with reference to market failure and using diagrams in various contexts: indirect taxation (ad valorem and specific), subsidies, maximum and minimum prices

subsidy = government assistance to firms in the production costs of a good or service

• good or service becomes less expensive to produce and consume → more production + more consumption

subsidy graph

• t = marginal tax

• P = producer benefit

• C = consumer benefit

• P + C = cost to government