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Subsidies

Subsidies 

A subsidy is a grant (usually provided by the government) to encourage producers to increase the production of a good or service, resulting to a reduction in its price. The subsidy is usually paid directly to the producers, reducing their costs of production and therefore creating producer benefit. Some of this benefit is passed onto the consumer as the price of the good or service is lowered as the quantity produced increases. The supply curve shifts out because of the increase in production. 

Image result for subsidy diagram
Subsidy

As with taxes, the distribution of consumer and producer benefit depends on the PED and PES of the good or service. In the case of inelastic PED, the price of the good is markedly reduced, meaning there is greater benefit for the consumer. Conversely, the more elastic the PED, the more the producer is able to benefit from the subsidy by keeping more of it. The area between 30 and 16 on the above diagram marks the total government expenditure on the subsidy. 


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