Question

The difference between a tax and a subsidy is that when the government places a tax on a good, it ________ the equilibrium price and ________ the equilibrium quantity, whereas when the government places a subsidy on a good, it ________ the equilibrium price and ________ the equilibrium quantity.

Answer 1

Answer:

For tax: Increases equilibrium price

II. Reduces equilibrium quantity

For subsidy: Reduces equilibrium price

Increases equilibrium quantity

Explanation:

Tax increases the price of a good or service or cost of production which makes the good more expensive. This discourages demand / supply and demand or supply falls. This leads to a fall in equilibrium quantity.

A subsidy is an amount given by the government to encourage production or consumption of a certain good. Subsidy given to producers reduces the cost of production, makes equilibrium price fall and encourages supply. This leads to an increase in supply so equilibrium quantity rises.

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