An increase in government subsidies for an industry, which reduces production cost, causes the market equilibrium price to decrease and the market equilibrium quantity to increase.
This is further explained below.
Generally, Certain industries or economic sectors may qualify for financial help from the government in the form of subsidies, which may take the form of payments, tax exemptions, or other types of economic assistance.
The purpose of subsidies is to lend assistance to or provide support for aspects of the economy or of the national infrastructure that is seen as being particularly important.
When there is a decrease in manufacturing costs, the supply curve for the industry moves to the right.
This creates a new point of balance in the system (the intersection of supply and demand curves). The new price on the market will be cheaper, and both production and consumption will increase to a greater extent.
In conclusion, The reduction in production costs brought about by a rise in government subsidies for a particular industry leads to a lower market equilibrium price and a greater market equilibrium quantity than would otherwise be the case.
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