Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It improves allocative efficiency by aligning social costs and benefits.
B
It may create deadweight loss by encouraging overproduction.
C
It guarantees that all producers will benefit equally.
D
It eliminates the need for any government regulation.
Understanding the Answer
Let's break down why this is correct
Answer
A subsidy is a financial support that the government gives to help lower the price of a good or service. When the government provides a subsidy, it encourages more production and consumption of that good, which can lead to a higher quantity being available in the market. However, this can also create market inefficiencies because the true cost of producing the good is not reflected in its price, leading to overconsumption. For example, if the government subsidizes bread, people might buy more bread than they really need, which could result in waste and misallocation of resources. Overall, while subsidies can make goods more affordable, they can disrupt the natural balance of supply and demand in the market.
Detailed Explanation
A subsidy can lead to too much of a good being made. Other options are incorrect because Some might think subsidies help everyone equally; It's a common belief that all producers gain from subsidies.
Key Concepts
Government Intervention
Market Efficiency
Allocative Efficiency
Topic
Government Intervention and Market Efficiency
Difficulty
medium level question
Cognitive Level
understand
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