Y1 30 Subsidy to solve market failure Flashcards
(2 cards)
1
Q
How does a subsidy solve market failure?
A
Subsidy lowers production cost
Lowers price of good, increase quantity, solves under/overconsumption, allocative efficiency, welfare gain
2
Q
Subsidy drawbacks
A
High cost: Government failure, producer subsidy reliance/inefficiency
Perfect info assumption: Over/undersubsidised
Price inelastic demand: Lower price not incentive for Q to increase
