Subsidies and Tax

Justifications of Subsidies

Reduces the cost for firms Keeps prices down which controls inflation Promotes consumption of merit goods, leading to positive externalities Slows down decline of an industry

Arguments against Subsidies

May reduce efficiency of firms Money may be better spent elsewhere Carry an opportunity cost - trade off

Types: Specific - causes parallel shift in supply curve Ad Valorem - pivot to the left for supply curve

Burdens:Some of the tax is passed onto the consumer. It depends on the elasticity of both the demand and supply curve.When demand is inelastic: the consumer will pay more taxWhen demand is elastic: the consumer will pay less tax.The firm may risk losing demand/customers.The Govt. prefers taxing inelastic commodities as there is a small fall in the amount consumed meaning more revenue.E.g. Cigarettes and petrol.

Subsidies

Tax