Understanding Subsidies: Analyzing and Evaluating Government Intervention in Markets

The video tutorial explores the concept of subsidies as a form of government intervention in markets. It explains how subsidies can address market failures by reducing production costs, shifting supply curves, and increasing market output. The tutorial also covers the analysis of subsidies using economic models like demand and supply curves, as well as marginal cost and benefit frameworks. Real-life examples, such as social housing in the UK, illustrate the application of subsidies. The video concludes by discussing the challenges of subsidies, including costs, beneficiaries, and imperfect information.

What is the primary purpose of a subsidy in a market?

• To increase the cost of production

• To decrease the market price and increase demand

• To eliminate competition

• To increase taxes

How do subsidies differ from indirect taxation?

• Subsidies decrease production costs, while indirect taxes increase them

• Both subsidies and indirect taxes decrease production costs

• Subsidies increase production costs, while indirect taxes decrease them

• Both subsidies and indirect taxes increase production costs

What happens to the supply curve when a subsidy is applied?

• It shifts inwards

• It shifts outwards

• It becomes vertical

• It remains unchanged

In a supply and demand diagram, what effect does a subsidy have on equilibrium price?

• It increases the equilibrium price

• It decreases the equilibrium price

• It has no effect on the equilibrium price

• It makes the equilibrium price unpredictable

What is the result of aligning private and social outputs through subsidies?

• Increased market failure

• Decreased social welfare

• Rectification of market failure

• Increased production costs

Why is it challenging to determine the correct size of a subsidy?

• Due to the ease of valuing externalities

• Because subsidies are always too small

• Due to the difficulty in valuing externalities

• Because subsidies are always too large

Who typically benefits from a subsidy?

• Only consumers

• Only producers

• Both consumers and producers

• Neither consumers nor producers

What is a potential negative effect of subsidies on producers?

• Increased international competition

• Increased market share

• Protection against international competition

• Decreased production costs

How are subsidies funded?

• Through consumer fees

• Through international aid

• Through general taxation

• Through private donations

What is a common issue with government interventions like subsidies?

• Perfect information

• Imperfect information

• Excessive information

• No information