4296749
Description
Flashcards by Jasmine Wells, updated more than 1 year ago
|
Created by Jasmine Wells
over 8 years ago
|
|
| Question | Answer |
| What 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. |
| How 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. |
| How 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. |
| Why 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. |
| What is the consequence of subsidies for consumers? | - They are affected by fall in price of good, therefore better off. |
| How 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. |
| How do subsidies impact government? | They may have to reduce expenditures on other areas of economy (Therefore experience opportunity cost). |
| What is the impact of subsidies on workers? | As output increases, firm is likely going to hire more workers |
| What 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 |
| How 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. |
| How 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) |
Want to create your own Flashcards for free with GoConqr? Learn more.