How could I evaluate a government policy which uses subsidies for a certain industry?

They might want to check if the price elasticty of demand for the good is elastic or inelastic. If it were elastic then the percentage change in price would be smaller than the percentage change in quantity demanded meaning this would be an effective policy to increase consumption of this good. However if the price elasticity of demand for the good were inelastic then this would not be such a good policy to effiectively increase consumption of the good. This could mean that the socially optimum point of consumption of the good might not be reached. 

One could also argue for the point of opportunity cost. By using government expenditure on this subsidy for a certain industry they forgo the opportunity to spend that money elsewhere. Depending on the specifics of the question one could argue that the money could have been better spent elsewhere. The money could have caused society to reach a place closer to socially optimum had it been spent on something else. 

Answered by Alice K. Economics tutor

1492 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What are the effects on UK businesses after an increase in fuel prices?


How can the Government increase aggregate demand


What are the characteristics of perfect competition?


Why is a firm's average revenue equal to their marginal revenue in perfect competition?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo
Cookie Preferences