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Economics explained
Category:
microeconomic policies
Subsidies
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Subsidies
A subsidy is a financial assistance provided by a government to reduce the costs of production for firms.
Purpose
This may be done for many reasons including:
to keep down the market prices of essential goods
to encourage greater consumption of merit goods
to contribute to a more equitable distribution of income
When paid to a producer, a subsidy has the opposite effect of an indirect tax – it is the equivalent of a fall in costs for the producer and results in a rightward shift in the market supply curve.
Introducing a subsidy in the market results in
a rightward shift in the market supply curve from S to S1
a fall in price from P to P1
an increase in the quantity traded from Q to Q1
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