subsidy impact

• Subsidies


  A monetary grant given to firms by the government to reduce their cost of production and encourage an increase in output
• Subsidies and government intervention


  • Solve market failures to encourage more consumption and production of goods/services beneficial to society
  • Encourage greater affordability of necessity goods/services for low-income households
• Impact of a subsidy


  1. Reduce cost of production for firms

  2. Shift supply curve downwards

  3. New equilibrium with lower price and higher quantity
• The vertical distance between the supply curves is the value of the subsidy per unit
• Subsidy is applied


  Price reduces and quantity increases
• Cost of subsidy to government


  Vertical distance between supply curves multiplied by new equilibrium quantity
• Producer revenue with subsidy


  Price x Quantity at new equilibrium plus government subsidy cost
• Consumer savings with subsidy


  Difference in price paid before and after subsidy, for original quantity
• Subsidy creates a deadweight welfare loss
• Stakeholder views on subsidies

  • Consumers (benefit from lower prices but concerned about funding)
  • Producers (love subsidies as increases revenue and surplus)
  • Workers (benefit from higher employment)
  • Government (want to solve market failures and improve affordability but concerned about cost and misuse)