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.
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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.
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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 1 asked this in May 2024, as part (b) for 15 marks; May 2023, May 2025 and November 2025 asked similar 15-mark questions, and May 2026 asked why governments subsidise, for 10.
Using real-world examples, evaluate the view that the government should never provide subsidies to firms.
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; D, S and S + subsidy shifted down by the subsidy.
- P1 → P2 (buyers pay less), P3 (producers receive), Q1 → Q2.
- The government's spending: the box between P3 and P2 up to Q2.
How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |