subsidy

Question 1

what is a subsidy

Answer 1

a financial payment to firms or individuals that does not need to be payed back, lowers cost to produce and encourages output

Question 2

chain of analysis for subsidy intervention

Answer 2

lowers cost of production - decreases price and increases quantity - solves underconsumption/production - allocative efficiency and welfare gain

Question 3

what are some potential negative effects of subsidies

Answer 3

maybe very costly, opportunity cost, benefits cut, imperfect information leads to not setting it at right level, potential gov failure, will firm use subsidy, price inelastic demand.