3.2.2—Subsidy impact/incidence

A subsidy is a payment to producers or consumers that lowers the effective cost of supplying or buying a good. It shifts supply or demand and creates a gap between the market price and the net price received or paid.

The benefit is shared according to relative elasticities, while government expenditure is funded from scarce resources. A subsidy can increase output but may create overproduction or fiscal cost.

A per-unit subsidy for public transport can lower the fare and raise passenger numbers; the operator receives the fare plus the subsidy.

A subsidy is not automatically received entirely by producers or consumers; incidence depends on market responsiveness.