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Explain the term 'subsidy' - Leaving Cert Economics - Question 11 - 2020
Question 11
Explain the term 'subsidy'. Explain two reasons why governments intervene in markets. 1. 2. Agriculture is very reliant on subsidies. Using the diagram below, dr... show full transcript
Worked Solution & Example Answer:Explain the term 'subsidy' - Leaving Cert Economics - Question 11 - 2020
Step 1
Explain the term 'subsidy'.
Answer
A subsidy is a financial aid provided by the government to support businesses or individuals in order to promote economic and social policies. This can take various forms, such as direct cash payments, tax breaks, or price supports. The main purpose of subsidies is to encourage the production or consumption of particular goods or services, often to make them more affordable for consumers or to support industries that are vital for the economy.
Step 2
Explain two reasons why governments intervene in markets.
Answer
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Correcting Market Failures: Governments intervene to address market failures, such as monopolies or information asymmetry, ensuring that resources are allocated efficiently and that consumers are protected from exploitation.
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Providing Public Goods: Governments provide public goods, which are non-excludable and non-rivalrous, such as national defense or public parks, ensuring that these essential services are available to everyone regardless of their ability to pay.
Step 3
Using the diagram below, draw the change in the supply curve as a result of the introduction of subsidies in agriculture. Explain your answer.
Answer
To illustrate the impact of subsidies on the supply curve, draw a rightward shift of the supply curve in the supply and demand diagram. The introduction of subsidies effectively reduces production costs for farmers, resulting in an increase in supply at every price level.
In the initial state, the supply curve (S1) intersects the demand curve (D) at equilibrium point (E1), setting the equilibrium price (P1) and quantity (Q1). After subsidies are introduced, the new supply curve (S2) shifts right, creating a new equilibrium point (E2), leading to a lower equilibrium price (P2) and a higher quantity supplied (Q2). This change reflects the expected outcome of subsidies in making agricultural products more accessible to consumers.