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A subsidy is a benefit given to an individual, business, or institution, usually by the government. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy.
Economic effects The effect of a subsidy is to shift the supply or demand curve to the right (i.e. increases the supply or demand) by the amount of the subsidy. Assuming the market is in a perfectly competitive equilibrium, a subsidy increases the supply of the good beyond the equilibrium competitive quantity.
A subsidy generally affects a market by reducing the price paid by buyers and increasing the quantity sold. Subsidies are usually Pareto inefficient because they cost more than they deliver in benefits. The buyers, who now pay a lower price, gain area B in consumer surplus.
The impact of subsidies. A subsidy is a payment made to firms or consumers designed to encourage an increase in output. A subsidy will shift the supply curve to the right and therefore lower the equilibrium price in a market. The amount of the subsidy is shown by the gap between the supply curves.
A subsidy is an amount of money given directly to firms by the government to encourage production and consumption. A unit subsidy is a specific sum per unit produced which is given to the producer. The effect of a specific per unit subsidy is to shift the supply curve vertically downwards by the amount of the subsidy.
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