Subsidies are government funds given to producers to help increase production and consumption of a good, by reducing their production costs.
Subsidies Example & Explanation:
Subsidies are a way for the government to incentivise the production/consumption of a good. By covering parts of the producers’ costs, more of the good can be produced, increasing the supply and lowering the market price (e.g. EU agricultural subsidies). Subsidies are usually provided to entire industries rather than a single firm, as a form of government intervention (like taxes, price controls and regulation). For example, if the government fully subsidises university education, then you would no longer need to pay any university fees! Subsidies can be used to increase consumption of merit goods that generate positive consumption externalities (e.g. vaccines/education), which will increase social welfare for society.
Subsidies Notes with Diagrams/Graphs:
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The left video explains what a subsidy is, the right explains a subsidy’s relationship with market failure.