Subsidies for Postive Externalities

Subsidies involves the government paying part of the cost to the firm to encourage more consumption, therefore supply shifts to the right.

Diagram of Subsidy on Positive Externality

• Subsidy = P2- P1
• The supply curve shifts to S2 and Price falls to P1
• People will now consume more at Q1
• Q1 = Social Efficiency: because SMC = SMB

Advantages of Subsidies

• a.) Increases social efficiency
  b.) Provides an alternative to the car

 

Disadvantages of Subsidies

• Is expensive and will requires higher taxes.
• Difficult to estimate positive externality
• Giving subsidies to firms may encourage inefficiency, because the firms can rely on government aid.
• Govt Failure: The govt may have poor information about the service
  

Essays and Revision Notes on Market Failure

• Market Failure
• Negative Externalities
• Positive Externalities
• Public Goods
• Merit and Demerit Goods
• Policies to Overcome Market Failure
• Tax on Negative Externality Diagram
• Subsidy on Positive Externality Diagram
• Market Failure at Tutor 2U
• Cost Benefit Analysis

Essays and Revision Notes on Government Failure

• Government Failure
• Privatisation of Public Services
• Should We Pay for NHS?
• Rationing and the NHS
• Why Government Intervention ?
• Market Failure
• Buffer Stocks