2.11 Government Intervention (SUBSIDIES)

Question 1

whats a subsidy

Answer 1

a form of government intervention, usually involves the government giving suppliers a payment that reduced the cost of production in order to encourage them to increase supply

Question 2

give some examples of subsidies

Answer 2

childcare funding

aid to businesses making losses

apprenticeship schemes

subsidies for wind farm investments

food/fuel subsidies

Question 3

what will happen to supply when a subsidy is in place

Answer 3

supply will increase due to the cost of supply decreasing

this will lead to a shift in the supply curve down and to the right

quantity supplied will increase
price will decrease

Question 4

advantages of subsidies to correct market failure

Answer 4

• enables greater social efficiency
• reduce negative externalilties e.g subsidies for renewable energy production can help reduce air pollution
• encourages positive externalities
• increase the consumption or production of goods and services that generate positive externalities
• Makes Merit Goods More Affordable by reducing the price to consumers. more merit goods consumed- improving social welfare
• reduce inequality by supporting low-income
• supports producers and maintains employment

Question 5

disadvantages of using subsidies to correct market failure

Answer 5

• cost will have to be met through taxation
• can lead to overproduction. lead to supply exceeding efficient levels, wasting resources and lowering prices below the true cost of production
• Firms receiving subsidies may have less incentive to cut costs or innovate, reducing productive efficiency.
• OPPORTUNITY COST. Government funds used for subsidies could have been spent on other welfare-improving areas. used in education, not enough money invested here could be an example of an unintended consequence
• difficult to target precisely. Subsidies may go to firms or consumers who don’t need them, causing allocative inefficiency.
• Once introduced, subsidies can be hard to remove, and firms may lobby for continued support regardless of actual need.

Question 6

it depends on

Answer 6

the size of the subsidy given.