Protectionist Subsidies (Edexcel IGCSE Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

How Do Subsidies Work?

  • 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

The supply of solar panels increases in the EU due to a per unit subsidy
The supply of solar panels increases in the EU due to a per unit subsidy

Diagram analysis

  • 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

An Evaluation of Subsidies

  • 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

Worked Example

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

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.