| What is the Main Purpose of Subsides? | -Encourages the Production, and Consumption of Goods that has Positive Externalities - Merit Goods. Subsidies leads to the Supply shifting to the Right
-Encourages the Purchase and Usage of Goods that can Reduce Negative Externalities
-Allows some Firms to become Internationally Competitive |
| Show, using a Supply Demand Diagram the Total Cost to the Government that comes from a Subsidy | -Supply will Shift to the Right.
-The Points that Mark the Total Gain are: The New Equilibrium Point, The Equilibrium Price, Point that has the Same Q as the Equilibrium Point but lies on the Old Supply Curve, and its Respect Price. |
| Show, using a Supply Demand Diagram, how the Total Gain that comes from a Subsidy is Split to a Producer Gain and Consumer Gain | -The Total Consumer Gain [Blue] is that of the New Equilibrium Point, Equilibrium Price, Point that has same Q as Equilibrium but lies on the Old Price Level of the Old Equilibrium, and then the Old Equilibrium Price Level
-Total Producer Gain [Pink] is that of the last 2 Points of the Consumer Gain, Point that has same Q as the Equilibrium [New one] but lies on the Old Supply Curve, and its respective Price Level |
| What is, only, the Consumer Gain and the Producer Gain? | -The Consumer Gain will be the Fall in Price that results from the Shifting Supply Curve
-The Producer Gain will be the will be Gain in Price. The 2 Points that Define the Price Difference have the Same Q [Of the New Equilibrium Point] but the Price Points are the Old Equilibrium Price, and the Price Level that will hit the Old Supply Curve [That has the same Q as the New Equilibrium Point |
| What are the Advantages of Subsides in the Market? | -Benefit of the Goods will be Internalised, and the Price of the Good is Reduced
-Subsidies can lead to Changes in Preference and make Merit Goods more Preferable as its Cheaper
-Positive Externalities are still Present - Wind Farms will keep on Reducing Pollution
-Subsdies can make Domestic Industries grow to a point that it can Exploit Economics of Scale and be Internationally Competitive |
| What are the Disadvantages of Subsidies in the Market? | -Difficult to put a Value on the Benefit of the Positive Externality
-Subsidies have an Opportunity Cost
-Subsidies can lead to Producers less Efficient and more Reliant - Less Innovation to Reduce Costs
-This is dependent [The Effectiveness] on the Elasticity of Goods. Inelastic Goods does naught
-Subsidised Goods may not be as Good as the Goods they want to Replace, so therefore it may be Wasted |
