What is the likely immediate effect of a government subsidy on the production of a targeted good?
Correct answer: B. It lowers effective costs and can increase supply
- A. It increases producers' costs and reduces supply
- B. It lowers effective costs and can increase supply
- C. It eliminates the need for taxation in the economy
- D. It automatically converts the good into a public good
Explanation
A production subsidy lowers the effective cost of producing the targeted good, which can encourage firms to supply more of it. A subsidy does not by itself make a good non-rival and non-excludable, nor does it remove the need for taxes.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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