Subsidy
Definition
A subsidy is a financial assistance given by the government to producers, usually in the form of a payment for each unit produced. It aims to lower production costs and increase supply.
Analogy
Imagine you want to sell lemonade at a school event, but it's expensive for you to make it. Suddenly, the school offers to pay you $1 for every cup of lemonade you sell. This financial assistance (subsidy) helps cover your costs and encourages you to make more lemonade (increase supply).
Related terms
Producer surplus: The extra profit earned by producers due to receiving a subsidy.
Price floor: A minimum price set by the government, often accompanied by a subsidy, which prevents prices from falling below a certain level.
Deadweight loss: The inefficiency that occurs when resources are misallocated due to market interventions like subsidies.
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