Government Intervention 2

Conversations welcome - Econowaugh's facebook

Subsidies

Subsidies - Pajholden

Subsidies - are grants provided by the government (taxpayers) to firms aiming at lowering production costs and increasing output.

Reasons that governments (taxpayers) give subsidies:

to promote exports by lowering the price of goods so they are more competitive in foreign markets.
to encourage socially beneficial activities. ex. community centers
to encourage consumption of merit goods. ex. libraries, museums

Impact of Subsidies:

Imposition of a subsidy will decrease the market price level and increase the quantity transacted of goods and services. This is graphed by a supply curve shifting to the right.

Effects on Stakeholders:

Consumers - are better off because they can pay a lower price to purchase goods and services. The vertical distance between the old supply curve and the subsidized supply curve is the value of the subsidy.
Producers - revenue increases and producers are better off.
Society - a welfare loss of (section A) is incurred. Resources are misallocated as there is potential gain that is not being captured.

There are no Multiple choice questions or FRQ's from the last 10 years having to do with subsidies. That is a good reason to study them.