How can the government offer subsidies to increase consumption and production?

To increase consumption and production, the government can offer a subsidy to reduce the price and increase quantity. The supply curve shifts to S2 and price falls from P1 to P2

What is a subsidy?

A subsidy is an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain Goods and Services. With subsidies, consumers are able to access cheaper products and commodities.

What is a subsidy for positive externalities?

Subsidies for positive externalities. Subsidies involve the government paying part of the cost to the firm; this reduces the price of the good and should encourage more consumption. A subsidy shifts the supply curve to the right and can be justified for goods which offer benefits to the rest of society.

What is the effect of a specific per unit subsidy?

The effect of a specific per unit subsidy is to shift the supply curve vertically downwards by the amount of the subsidy. In this case the new supply curve will be parallel to the original. Depending on elasticity of demand, the effect is to reduce price and increase output.

How are consumer and producer surpluses calculated when a subsidy is introduced?

When a subsidy is put in place, the consumer and producer surplus calculations get a bit more complicated, but the same rules apply. Consumers get the area above the price that they pay (Pc) and below their valuation (which is given by the demand curve) for all the units that they buy in the market.

What is subsidy in economics?

Subsidy – government payment to producers attempting to lower the price of produce and increase quantity produced (encourage production). In the international trade context, the subsidy is given to domestic producers to increase their international competitiveness. See the diagram below: