Subsidy

Question 1

State + explain the micro effects of introducing subsidies.

Answer 1

• Price + Consumer Surplus: reduces P by reducing CoPS - therefore increasing consumer surplus.
• Quantity + Market Failure: increases Q - deals with market failure where Q is too low (e.g. where there’s PE).
• Affordability + Equity: improves affordability + equity for essential goods + services (e.g. health, education).
• Producer Revenue + Inefficiency: could promote inefficiency for private businesses - need not minimise costs - not productively efficient.
• Costs To Government: very costly.

Question 2

State + explain the macro effects of introducing subsidies.

Answer 2

• Protect Domestic Producers + Workers: protectionism.
• Inflation: if subsidy is used widely throughout economy - could reduce CoPs for many firms - shifts SRAS right - reducing cost-push inflation.
• International Competitiveness: link subsidies to improving international competitiveness, CA position + trade.
• Government Finances: budget deficit worsening, national debt increasing.
• FDI: wide spread subsidy could attract FDI.