What are some advantages or disadvantages of governmental subsidy?

Answer 1

ADVANTAGESOF A SUBSIDY

1. 1. Reduces cost of production

2. 2. Releases resources to be used for other purposes e.g expansion (increased supply)

3. 3. Increases the firms competitive edge in terms of prices. With subsidies they are able to cover cost without making their products unaffordable.

DISADVANTAGES OF A SUBSIDY

1. 1. They are expensive (higher taxes)

2. 2. They may encourage inefficiency by relying more in the subsidy money

3. 3. It is difficult to decide on who may receive a subsidy

4. 4. They can create a production surplus which may end up as waste.

5. 5. They encourage new entrants into the industry even when demand does not require these.

6. 6. It increases dependence of firms and hence, might not provide motivation necessary for increasing efficiency and supply.