ACCA Applied Knowledge · Business and Technology · Microeconomic factors
Which of the following is an example of a government subsidy intended to correct a market failure?
A payment to firms to install renewable energy equipment is the subsidy. A subsidy is government money given to producers or consumers to lower costs and encourage an activity. Here it promotes output with positive externalities, whereas taxes, price ceilings and bans are different forms of intervention.
- AA tax on cigarettes to reduce smoking
- BA payment to firms to install renewable energy equipment, encouraging a positive externalityCorrect
- CA legal ceiling on the price of bread
- DA ban on the sale of a harmful product
Explanation
A subsidy is a payment by government to producers or consumers that lowers costs and encourages output. Paying for renewable energy equipment encourages activity with external benefits. Options A, C and D are a tax, a price control and a prohibition respectively.
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