Master the IB International Economics HL 2025 – Elevate Your Knowledge and Ace the Exam!

Subsidies are financial aids provided by the government to support businesses, typically with the intention of increasing production and encouraging certain industries. By reducing the production costs for firms, subsidies enable producers to offer goods at lower prices or increase their output without necessarily raising prices. This makes it easier for domestic producers to compete both in local and international markets.

When domestic production costs are decreased, firms can also reinvest saved funds to grow their operations, enhance productivity, or innovate, further increasing the production of goods. This government intervention can lead to an increase in the quantity of goods produced within the country, fostering a more competitive domestic market.

While subsidies can have varying impacts on consumer welfare and employment, the primary and most direct effect is the reduction in production costs, which in turn motivates increased domestic production.