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ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business

A government introduces a new subsidy paid to domestic manufacturers of electric vehicles. Which of the following is the most direct intended effect of this policy on the industry?

A subsidy is a government payment to producers that lowers their effective costs, encouraging them to produce more of the favoured product. It does not tax imports, limit market entry or impose reporting duties, which are different policy tools.

  1. ATo reduce the production costs borne by the manufacturers and encourage outputCorrect
  2. BTo raise the price of imported vehicles through a tax on them
  3. CTo restrict the number of firms allowed to enter the market
  4. DTo require manufacturers to publish environmental reports

Explanation

A subsidy is a payment from government that lowers the effective cost of production or price to buyers, encouraging supply or demand in the favoured industry. Raising import prices would be a tariff, restricting entry would be a licensing or regulatory barrier, and publishing reports is a disclosure requirement.

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