Subsidy

Question 1

What is a subsidy

Answer 1

A money grant to firms given by the government to reduce costs of production and encourage an increase in output

Question 2

What are the aims of subsidies

Answer 2

Increase affordability

Solve market failure - encourage consumption and production

Question 3

How does a subsidy affect the supply curve

Answer 3

Shifts rightwards

Question 4

How does a subsidy affect price and quantity

Answer 4

Price reduces

Quantity increases

Question 5

What do key stakeholders think of subsidies

Answer 5

Consumers - prices fall, more choice and greater affordability (how to fund)

Producers/workers - huge increase in revenue, greater employment and producer surplus

Government - if they work (expensive and how are they being used)

Question 6

How does a subsidy solve market failure

Answer 6

Lowers costs of production

Reduced price and increases quantity

Solves underconsumption/production

Allocative efficiency and a welfare gain

Question 7

Evaluation for using a subsidy to solve market failure

Answer 7

Cost
Setting subsidy at the right level
How will firms use the subsidy
Price inelastic demand