Subsidies - 2021 Revision Update
- AS, A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 7 Jan 2021
In this revision resource, we apply, analyse and evaluate government subsidies to producers and consumers in different markets.
A subsidy is any form of government support—financial or otherwise—offered to producers and (occasionally) consumers. Subsidies to producers reduce the marginal cost of supply.
A subsidy usually leads to an increase in the output sold of a good or service at a lower market price.
Examples of government subsidies to producers
- Job Retention Scheme (wage subsidy) for furloughed workers during the pandemic
- Government grants for businesses employing youth unemployed / long term jobless
- State aid for loss-making businesses such as airlines & train operating companies, bus companies and steel plants
- Subsidies for construction companies for example to build low-cost affordable housing
- Export subsidies for selected producers – where the government offers a minimum priced for selling products overseas
Examples of government subsidies for consumers
- Subsidies for people buying electric vehicles
- Feed-in tariffs for renewable energy fed back into the grid by households
- Food and energy subsidies – often used in emerging / developing countries
- Boiler scrappage schemes – a grant to help households to install newer, fuel-efficient heating systems
- Free television licences for the over-75s
- Scotland – new legal duty in 2021 on local authorities to ensure that free items such as tampons and sanitary pads are available to "anyone who needs them".
- Subsidies (tax-free) for childcare
Subsidies - analysis diagrams
In this video we go step-by-step through how to show the effect of a government subsidy offered to suppliers using an analysis diagram.
Subsidies - Evaluation Perspectives
When might subsidies be justified as a government intervention in a market?
- Helping poorer families with food and childcare costs particularly during an economic crisis
- Improved nutrition can lift labour productivity and reduce the long-term burden on health services
- Encourage output and investment in fledgling sectors such as life sciences and renewable energy
- Protect jobs in loss-making industries hit by recession and by external economic shocks
- Improve housing and transport affordability to improve geographical mobility of labour
- Reduce the cost of training & employing workers
- Encourage the arts and other cultural services which have social benefits
What are some of the potential disadvantages of government subsidies?
- Producers can become “subsidy dependent”
- Subsidies can distort resource allocation
- Subsidies can lead to excess production / surpluses
- Environmental risks from excessive production
- Government failure arising from political lobbying
- Subsidies can be very expensive - taxpayers bear the cost