Subsidies

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    Subsidies

    • The purpose of a subsidy is to reduce the cost in order to provide a higher level of production or consumption than would exist if it was left to the free market
    • Such payments are particularly relevant in the case of merit goods and where products generate positive externalities
    • In all such cases, if left to the free market, there would be under-production and under-consumption.
    • Allocating subsidies can be controversial.
    • An important thing to consider when deciding to allocate a subsidy is whether there is an external benefit

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