2.11 Subsidy

• What is a subsidy?

  A payment by government to encourage production
• What is one advantage of using a subsidy?

  It increases production and consumption of merit goods
• How does a subsidy affect resource allocation?

  It leads to a more efficient allocation of resources
• Why might subsidies be considered more efficient than price controls?

  They allow market interactions to allocate resources
• How do subsidies affect income inequality?

  They reduce the proportion of income spent by low-income buyers
• What is a disadvantage of using subsidies?

  Determining the correct level of subsidy is difficult
• What is an opportunity cost associated with subsidies?

  Funds could be used more efficiently elsewhere
• How can subsidies affect producer efficiency?

  They may lead to less efficient production for high-cost producers
• What does price inelastic demand imply for subsidies?

  A high subsidy may be needed to increase consumption
• What political issues can arise from subsidies?

  They may encourage corruption and preferential treatment
• What is one reason governments grant subsidies?

  To increase production and consumption of merit goods
• How do subsidies relate to macroeconomic objectives?

  They influence economic activity to meet government objectives
• What factors should be considered when evaluating subsidies?

  • Size of subsidies paid
  • Price elasticity of demand (PED)
  • Funding sources and opportunity costs
  • Effectiveness in improving resource allocation
• How do consumers benefit from subsidies?

  They pay lower prices and consume more quantity
• What happens to total consumer spending if demand is price elastic?

  Consumer spending increases
• What happens to total consumer spending if demand is price inelastic?

  Consumer spending falls
• What is the effect of subsidies on producer revenue?

  Producers sell more and receive higher revenue
• What is the impact of subsidies on government finances?

  The government loses the total amount paid in subsidies
• What is the welfare loss if the market is not failing initially?

  Gains in surplus are less than subsidy payments
• What subsidy amount did Russia announce for electric vehicles?

  25% of the purchase price
• What was the purpose of Russia's subsidy for electric vehicles?

  To boost domestic demand and manufacturing
• How much was spent on direct payments to EU farmers in 2019?

  €38.2 billion
• What is the effect of higher subsidies on UK producers?

  They become more price-competitive internationally
• How do subsidies affect aggregate demand?

  They may lead to increased aggregate demand
• What is a potential negative perception of subsidies by other governments?

  They may be seen as anti-competitive or protectionist
• What is the effect of a subsidy on the supply curve?

  It shifts the supply curve to the right
• What happens to the market price when a subsidy is introduced?

  The market price is likely to fall
• What is the relationship between subsidy and quantity traded?

  Quantity traded increases with a subsidy
• What is the effect of a subsidy on consumer expenditure?

  Consumer expenditure increases when prices fall
• What is the relationship between price elasticity of demand and consumer spending?

  If demand is elastic, spending increases
• What does PED stand for?

  Price Elasticity of Demand
• What does a negative PED value indicate?

  Demand decreases as price increases