Subsidies

• Subsidy


  A payment from the government to a producer to lower their costs of production and encourage them to produce more.
• Subsidies encourage the consumption of merit goods; internalises the external benefits.
• Consumers gain more from the subsidy when demand is price inelastic
• Disadvantages of subsidies:

  • Opportunity cost to the government
  • Potential higher taxes
  • potential for firms to become inefficient if they rely on subsidy
  • Government failure, if less efficient industries are subsidised