Subsidy
Definition. A subsidy is a payment made by the government to producers or consumers that reduces the cost of supplying or buying a good or service. A subsidy to producers shifts the supply curve downward by the amount of the subsidy, lowering the price paid by consumers and raising the quantity traded.
Subsidies are often used to encourage consumption of goods with positive externalities or merit goods, or to support producer incomes. They raise output towards the social optimum but impose a cost on the government budget.
This term belongs to Indirect Taxes and Subsidies in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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