Karteikarten
4.3: Subsidies
Karten in diesem Stapel (11)
- 1What is a subsidy?A sum of money granted by the government to assist firms, consumers, or industries in effect to decrease overall cost of production.
- 2How do subsidies have the effect of changing allocation of resources?Because they affect relative prices, thus changing signals and incentives prices convey.
Subsidies allow greater production and consumption than in the free market. - 3How do subsidies have an effect on producers?Subsidies granted to a firm has an effect of increasing price received by producers causing them to produce more for cheaper - lower cost of factors of production.
- 4Why do governments grant subsidies?1) Can be used to increase revenues (and incomes) of producers. E.g. agricultural (to keep them producing)
2) Can be used to make certain goods affordable to low income consumers. E.g. Bread/housing
3) Can be used to encourage production and consumption of particular goods and services that appear to be desirable. E.g. Education
4) Can be used to support growth of particular industries in an economy. E.g. Promoting growth of solar panels
5)Encourage exports of particular goods - Lower prices increase quantity of exports
6) A method of improving allocation of resources (reducing allocative inefficiency) by correcting positive externalities. - 5What is the consequence of subsidies for consumers?- They are affected by fall in price of good, therefore better off.
- 6How do subsidies impact producers?They are better off, as they receive higher prices and produce larger quantities of output. Therefore, increasing in revenues after subsidy.
- 7How do subsidies impact government?They may have to reduce expenditures on other areas of economy (Therefore experience opportunity cost).
- 8What is the impact of subsidies on workers?As output increases, firm is likely going to hire more workers
- 9What is the impact of subsidies on the whole of society?Worse off
Overallocation of resources to a production of good
Tax payers have to pay taxes for government to give subsidy - 10How do subsidies affect foreign producers?They are worse off
- Subsidies lower prices and increases quantities of export.
- Foreign competition may be unable to compete with lower prices of subsidised goods. - 11How do subsidies create welfare loss?The granting of a subsidy results in greater consumer and producer surplus, however society loses due to government spending on the subsidy.
- Since the loss of government spending is greater than the gain in producer and consumer surplus, welfare loss results, reflecting allocative innefficiency (due to overallocation of resources to the production of the good). (MC>MB)
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- Karteikarten am 4.3: Subsidies, erstellt von Jasmine Wells am 12/01/2016.
- Erstellt von
- Jasmine Wells · Jan 2016
- Aktualisiert
- 15 Mai 2016
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