Subsidies

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).