What are Subsidies?
- Subsidies are government funding of the production of certain goods to increase their supply.
- Generally targets goods that are beneficial to society or to the economy, which suppliers wouldn't have the incentive to produce as much as otherwise.
Purpose of Subsidies
- Increased producer revenues
- Make basic necessities more affordable
- To support the growth of ap articular industry
- Encourage the consumption of a particular good or service
Subsidies on a Graph
- The supply curve shifts to the right, meaning that supply increases.
- Vertical distance between supply curves is the subsidy per product.
- Vertical shift distance between the supply curves multiplied by the quantity is the subsidy.
- The new supply curve is called "S + subsidy".
Impact of Subsidies
- Application of subsidies have effects on many variables. Generally they are the exact opposite to the impact of indirect taxes.
Price: decreased
Quantity: increased
Government: increase in spending
Producer: increase in revenue
Consumer: lower expenditure
Community Welfare: decrease
Allocative Efficiency: Inefficient (due to over-allocation of resources)
Points of Evaluation for Governments
- Opportunity costs of government spending on the subsidy.
- The efficiency loss for businesses since they do not have to complete with foreign producers as they would have in a free-market.
- Increased level of taxes it will cause.
- The possible damage to foreign producers, who might not be able to compete with the reduced prices caused by subsidies (e.g. small scale farmers in developing countries).