Subsidies

• Subsidy

  any form of government financial support, which reduce the marginal cost of supply
• Advantages of subsidies

  • increase effective demand, lowering price
  • can increase supply for merit goods, which have positive externalities
  • increases profit for firms, which can be used to reduce negative externalities
• Disadvantages of subsidies

  • financially unsustainable
  • all firms want subsidies
  • paid via taxes, so consumers have less disposable income
  • opportunity cost from giving to firms instead of investing in other things
  • firms become over-reliant
• subsidy diagram

  • expands supply