Protectionist Subsidies (Edexcel IGCSE Economics)
Revision Note
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
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 |
|
Foreign producers |
|
Consumers |
|
Government |
|
Standards of living |
|
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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