Subsidy: a government payment to domestic producers that lowers their costs of production.
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The points to remember
- On the diagram: domestic supply shifts right; the price stays at Pw; imports fall.
- The government pays subsidy × home output.
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An export subsidy pays firms for each unit they sell abroad.
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Who gains, who loses
Home producers gain
They sell more at the same price, with lower costs.
The government pays
€60 thousand that cannot go to schools or hospitals: an opportunity cost.
Consumers: little change
With a production subsidy the price stays at Pw.
Foreign producers lose
They sell fewer imports: the EU's farm subsidies anger poorer exporters.
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Paper 2 asked this in May 2026, for 4 marks.
Text A says that the government is paying a subsidy to domestic sugar producers.
Using an international trade diagram, explain how the subsidy is likely to affect sugar imports.
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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 |