A subsidy lowers producers' costs, so they supply more at every price.
Why governments give subsidies
More of a good thing
Solar panels or vaccines help everyone, so the government wants more of them.
Cheaper essentials
Bread, milk or bus fares cost less for low-income households.
Steady incomes for producers
Farmers' incomes stop swinging so much with the weather.
Protect key industries
Local firms can compete with cheap imports and keep jobs.
The points to remember
- A subsidy shifts supply down (right) by the subsidy.
- The price falls, the quantity rises, and the government pays for every unit sold.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
Watch a €2 subsidy on each unit.
Our example (made-up numbers)
| Before | After the €2 subsidy | |
|---|---|---|
| Price buyers pay | €6 | €5 |
| Price producers get | €6 | €7 |
| Quantity | 40 | 50 |
| Cost to the government | €0 | €100 |
Animated graph
Watch the graph build step by step in study mode.
Remember it as: A subsidy: buyers pay less, producers get more, taxpayers pay the gap.
Stop wasting time on topics you know
Our AI identifies your weak areas and focuses your study time where it matters. No more overstudying easy topics.
A subsidy helps the market's buyers and sellers, at a cost to everyone else.
Who gains, who pays
Consumers
Pay a lower price and buy more.
Producers and workers
Get a higher price, sell more and hire more.
Taxpayers and the government
Pay the bill; the money cannot be spent on anything else.
Foreign producers
Lose sales to the subsidised firms.
The points to remember
- With no positive externality, the extra output is a welfare loss: too much is produced.
- The opportunity cost: what else the government could have done with the money.
Paper 3 reads a subsidy diagram and asks short calculations. With our €2 subsidy:
Subsidy calculations
Subsidy per unit
The vertical gap between S and S + subsidy: €2.
Government spending
€2 × 50 = €100.
Change in consumer surplus
½ × (40 + 50) × (€6 − €5) = +€45.
Change in producer surplus
½ × (40 + 50) × (€7 − €6) = +€45.
Welfare loss
Spending €100 − gains €90 = €10: ½ × (50 − 40) × €2.
How a 2-mark subsidy calculation is marked
| You write | Marks |
|---|---|
| Valid working (e.g. ½ × (Q1 + Q2) × the change in price) | 1 |
| The answer with units | 1 |
| The answer only, no working | 1 |
See how examiners mark answers
Answer exam-style questions with model answers. Learn exactly what earns marks and what doesn't.
Paper 2 asked this in November 2024, for 4 marks; November 2025 and May 2026 asked the same about energy subsidies.
Using a demand and supply diagram, explain how a subsidy on gasoline increases government spending.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
What the diagram must show
- Axes P and Q; supply shifting down/right.
- The area of the subsidy (government spending) shaded or lettered.
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |