Subsidy
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The payment from the government to individuals or a group of individuals, usually firms
Reasons for government to grant subsidies
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Subsidy can be used to increase firm’s revenue
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Lower down the price of the basic necessities
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Encourage production and consumption toward a particular good
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Support growth of particular industries
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Encourage export of particular good
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Solve negative externalities / Improve the allocation of resource
Market outcome of Subsidy
Effect on market
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Initially the market was at an equilibrium level of output with price P* and quantity Q*. After the subsidy is granted, the supply has increased, shifting the supply curve from S1 to S2 due to the decrease in cost of production. This therefore forms a new equilibrium output, with a lower price for consumers Pc, a higher receiving price for producers Pp, and greater quantity Qsb. The vertical difference between S1 & S2 represents the per unit subsidy
Consequence of Subsidy for stakeholders
