Economics: Subsidies Flashcards

Questions and Answers

What is a subsidy?

A payment made to a firm or individual by the government (correct)

A payment made by individuals to the government

A fixed tax per unit of output

A loan provided to companies by banks

What is a specific subsidy?

A fixed amount per unit of output

How do subsidies impact the allocation of resources?

They affect relative prices and lower production costs, leading to increased supply and consumption.

Why do governments subsidize socially beneficial products?

To encourage consumption and production of beneficial goods like vaccinations. Signup and view all the answers

What is one reason governments subsidize industries?

To support a producer or industry by lowering their production costs. Signup and view all the answers

What do governments do if imports exceed exports?

Provide subsidies to make goods cheaper for overseas markets. Signup and view all the answers

How do consumers benefit from subsidies?

They pay lower prices and find increased availability of goods. Signup and view all the answers

What is a consequence of subsidies for producers?

Producers experience increased revenue and reduced production costs. Signup and view all the answers

How do subsidies affect workers?

Workers benefit from increased demand and employment. Signup and view all the answers

What is a negative consequence of subsidies for the government?

Their budget is negatively impacted, leading to potential cuts in other areas. Signup and view all the answers

How does society fare as a result of subsidies?

Society is worse off due to overallocation of resources to specific goods. Signup and view all the answers

Study Notes

Subsidy Overview

A subsidy is a government payment to firms or individuals aimed at increasing the purchase or supply of specific goods.

Specific Subsidy

Defined as a fixed monetary amount allocated per unit of output.

Impact on Resource Allocation

Subsidies alter resource allocation by affecting relative prices, which change signals and incentives.
They reduce production costs for firms, leading to increased supply and a downward shift of the supply curve.
Higher prices received by producers also contribute to the downward curve shift, resulting in greater consumption and production.

Reasons for Government Subsidies - Socially Beneficial Products

Subsidies promote the consumption and production of goods deemed socially beneficial, like vaccinations.

Reasons for Government Subsidies - Support Industries

Governments use subsidies to assist industries by lowering production costs and enhancing revenue.

Reasons for Government Subsidies - Balance of Payments Deficit

To address a trade imbalance, where imports exceed exports, governments may subsidize goods to lower prices in international markets.

Consequences of Subsidies - Consumers

Consumers benefit as subsidies lower prices and increase the availability of goods in the market.

Consequences of Subsidies - Producers

Producers gain from increased revenue due to higher market supply and reduced production costs.

Consequences of Subsidies - Workers

Employment rises as increased output leads to a greater demand for workers.

Consequences of Subsidies - Government

Governments face negative budget impacts as subsidies increase outlays, potentially leading to reduced spending in other areas (opportunity cost).

Consequences of Subsidies - Society

Overallocation of resources to subsidized goods can lead to societal downsides, indicating inefficiencies in resource distribution.

Description

Test your understanding of subsidies with these flashcards. The quiz covers key definitions and implications of subsidies, including specific types and their impact on resource allocation. Perfect for economics students looking to reinforce their knowledge.