How does a subsidy impact a market?

2 Answers

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

A subsidy typically impacts a market by increasing the supply of the good or service in question.  An increase in supply will lead (all other things being equal) to a reduction in the equilibrium price and an increase in the equilibrium quantity exchanged.  In other words, more of the product will be bought and sold at a lower price.

Subsidies do this because they encourage producers to produce a given good.  They reduce the effective price of producing the good.  This means that the producer gets more profit at any given sale price.  This makes producers want to produce more, thus increasing supply.

ershruti304's profile pic

ershruti304 | College Teacher | eNotes Newbie

Posted on

Subsidy is offered for promoting the sales of products and hence motivating business growth. For example if handloom industry is dying out, government can offer subsidy to this sector. By doing so the cost of production  goes down and attracts large number of producers to invade this sector. In this process many handloom industries comes up, employing large number of people thus decreasing unemployment rate. Customers also get access to high quality products at economical prices.

Thus by offering subsidies every one is benifited like Government, producers and customers.