1
Q
What is a subsidy?
A
A payment by the government to firms to reduce production costs and encourage output.
2
Q
How does a subsidy affect supply?
A
Shifts the supply curve vertically downwards/right by the size of the subsidy.
3
Q
Why do governments give subsidies?
A
To encourage merit goods, increase employment, support industries, or reduce market failure.
4
Q
What happens to price and quantity after a subsidy?
A
Price to consumers falls, price received by producers rises, quantity increases.
5
Q
How is the cost of a subsidy calculated?
A
Subsidy per unit × quantity sold.
6
Q
One disadvantage of subsidies?
A
High cost to government and possible overproduction.
econ
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