Answer to Question #315213 in Microeconomics for Eugene

Question

Discuss the need for and problem associated with the administration of subsidies?

Answer 1

A subsidy is a direct or indirect payment to individuals in form of a cash payment from the government or a tax cut. Subsidies are needed so as to offset market failures and externalities to achieve greater economic efficiency. Although subsidies ensures greater supply of goods it can lead to a shortage in supply due to rise in demand for the same goods. Subsidies contribute to difficulty for a government to measure success though it is effective.