1 - Gov Intervention - Subsidies

Question 1

What’s a producer subsidy?

Answer 1

Payments to producers by gov to reduce costs of production

Question 2

What are consumer subsidies?

Answer 2

Payments to consumers to allow them to purchase more of a good/service

Question 3

Advantages of producer subsidies

Answer 3

• corrects market failures
• encourages consumption of merit goods
• encourages investment and innovation
• helps protect producer incomes/jobs
• supports those on lower incomes
• can help tackle climate change
• can help make imports more competitive

Question 4

Disadvantages of producer subsidies

Answer 4

• opp cost
• firms may become over reliant on
• firms have less incentive to be efficient and productive
• firms may spend extra profit on shareholders and not re-invest
• fraud/corruption
• gov failure

Question 5

Eval of subsidies

Answer 5

• are they meeting their aims?
• will it promote efficiency?
• opp cost
• help correct market failure?
• unintended consequences?
• outcome depend on size of subsidy? Or on elasticity of demand/supply?