Protectionist Subsidies (Edexcel IGCSE Economics)

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Economics & Business Subject Lead

A subsidy is an amount of money paid to the firm by the government for each unit produced
It lowers the cost of production for domestic firms, and as a result, they can increase output and lower prices
- With lower prices their goods/services are more competitive internationally
- The level of exports increases
The increased output may result in increased domestic employment

To help meet its climate change targets and lower household energy bills, the EU has provided a subsidy to solar panel retailers
- This causes an increase in supply of S₁→ S₂
At the original market clearing price of P₁, a condition of excess supply now exists (surplus)
- The supply of solar panels is greater than the demand
In response, sellers in the EU lower prices
- This causes an expansion of demand and a contraction of supply, leading to a new market equilibrium at P₂Q₂
- The equilibrium price (P₂) is lower, and the equilibrium quantity (Q₂) is higher than before
- The excess supply in the market has been cleared

Subsidies often allow domestic firms to grow as they have limited competition from businesses abroad

Evaluating Subsidies

Stakeholder	Explanation
Domestic producers	Decreases costs of production Increases output Increases international competitiveness Encourages greater employment
Foreign producers	It makes it harder for them to compete with domestic firms
Consumers	Lowers prices
Government	This costs the government the amount of the subsidy There is an opportunity cost associated with every subsidy provided
Standards of living	Improves for consumers as they benefit from lower prices - their income goes further

Which method of protectionism is used to reduce the price of exports?

A. Tariffs

B. Free Trade

C. Quotas

D. Subsidies

D is the correct answer.

Subsides lower the cost of producing an output and allow the firm to pass on the lower costs in the form of lower prices.

A is incorrect, as this would raise the price of imports

B is incorrect, as free trade would have no direct effect on lowering the price of export.

C is incorrect, as this would raise the price of imports

the (exam) results speak for themselves:

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