Economics of
Government Subsidies
AS Microeconomics
November 2009
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Should we offer subsidies for these?
Government subsidies
•
Subsidies
represent payments by the government to
suppliers that have the effect of reducing their costs
and encouraging them to increase output
•
The effect of a government subsidy is to increase
supply
•
Other things being equal, a subsidy on a product will
lower its price causing an expansion of market
demand
•
The total amount spent on the subsidy is equal to the
subsidy per unit multiplied by total output
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