Topic: Subsidies

Q1

A subsidy has been introduced on solar panels in the UK. Why has the UK Government done this
and what are they hoping is the desired effect on the market?

Why: To increase solar panel production and increase renewable energy. (incentivise consumers to
switch to solar panels // too expensive without intervention)

Desired Effect on the Market: Gives money to companies (free grants) producing solar panels, thus
decreasing cost of production and increasing supply, also decreasing the market price.

Q2

The diagram below represents a subsidy placed by the Government on a product:

Calculate the consumer gain

80x10=800

Calculate the cost to the Government

20x80=1600

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Topic: Subsidies

Q3

True or false: You may need to draw some diagrams in rough to help you!

A subsidy is a payment by the government to suppliers that reduce their True

costs of production and encourages them to increase output.

The effectiveness of a subsidy will depend on the price elasticity of True

demand for the product

The effect of a government subsidy is to decrease supply and reduce the False
market equilibrium price.

A subsidy payment shifts the market to a disequilibrium False

The total cost of the subsidy is the amount of subsidy per unit multiplied True
by the new level of output (sold)

A subsidy payment shifts the market to new equilibrium True

If the government gets its calculations wrong, then the subsidy payments True
may need to be reduced to make them more affordable

Q4

Recently, the UK government reduced the size of the subsidy on solar panels. State and explain 2
possible reasons why (remember to refer to the diagram in question 2):

It was too expensive to maintain, and the opportunity cost was bigger than the gain; the government
decided to invest its money elsewhere

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Topic: Subsidies

Q5

The diagram below represents a subsidy placed by the Government on a product:

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