Subsidies
Role of Government in Microeconomics
AO2·AO4·Diagram required
Syllabus requirement
Payments from the government to producers to encourage production and lower prices.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing a subsidy shifting the supply curve downward. Indicate new equilibrium, government expenditure, and impact on quantity and price.
Summary
This topic explains why governments intervene in markets by using tools such as subsidies to influence production, consumption and equity, and to correct market failures. Subsidies reduce firms' costs so that merit goods and other socially desirable outputs become more available, affecting prices, quantities and government expenditure. Understanding subsidies is important for analysing trade-offs between efficiency, equity and public spending in microeconomic policy.
