Subsidy- Full Market Impact Flashcards
(16 cards)
What is a subsidy in microeconomics?
A money grant given to firms by the government to reduce production costs and encourage more output of goods/services.
What are the main reasons governments give subsidies?
Correct market failures (e.g. underconsumption of merit goods)
Make essential goods/services more affordable
Encourage production/consumption of beneficial goods (e.g. education, healthcare, transport)
How does a subsidy affect the supply curve?
It shifts the supply curve downward or rightward,
as production becomes cheaper for firms.
What is the impact of a subsidy on price and quantity?
Price decreases (from P1 to P2)
Quantity increases (from Q1 to Q2)
On a supply and demand diagram, how is a subsidy shown?
As the vertical distance between the original supply curve and the new subsidised supply curve (S1 to S1sub) — this represents the subsidy per unit.
Who benefits from a subsidy?
Consumers: Lower prices
Producers: Sell more output
Society: More consumption of beneficial goods
How do you calculate the cost of a subsidy to the government?
Use the vertical distance between the two supply curves (S to S + subsidy) to find the subsidy per unit.
Multiply by Q2 (new output level).
Gov cost = subsidy per unit × Q2 (area of rectangle abcd).
How do you calculate producer revenue before and after a subsidy?
Before subsidy: Producer revenue = P1 × Q1
After subsidy: Revenue = P2 × Q2 + government subsidy (same area abcd)
Producer revenue increases significantly with the subsidy.
How do consumers benefit from a subsidy?
Pay a lower price (from P1 to P2)
Buy more (Q1 to Q2)
Consumer saving = P1 – P2 × Q2 (area between price lines at same quantity)
What is the deadweight welfare loss from a subsidy?
Represented by the triangle abd on the diagram.
Caused by inefficient overconsumption due to artificially low prices, funded by taxpayer money.
Why might governments still support subsidies despite the welfare loss?
Because subsidies can:
Correct market failures
Increase affordability
Promote merit goods
Support social equity even if there’s a cost
How do consumers benefit from subsidies?
Lower prices → more affordable goods
Increased consumer surplus
Greater quantity and choice
Especially beneficial for low-income households (e.g., necessities)
What are the potential concerns for consumers with subsidies?
May lead to higher taxes in the future
Cuts to other public services (opportunity cost)
If funded through borrowing, interest must be repaid
Long-term affordability of subsidies is uncertain
Why do producers and workers like subsidies?
Higher revenue and producer surplus
Subsidies reduce costs, encouraging output
Can lead to more jobs, as labor is a derived demand
What are concerns about producers receiving subsidies?
Dependency on subsidies may reduce efficiency
Could be misused: money spent on dividends or salaries, not innovation
Less incentive to cut costs or improve productivity
What is the government’s view on subsidies?
Helps achieve economic aims: correct market failure, increase merit goods
May boost employment and welfare
But must balance with budget limits, possible inefficiency, and opportunity cost
