Question

explain how a subsidy is a tax in reverse.

Answer 1

Solution -

Subsidy

A subsidy is a reverse tax where the government gives money to consumers (or producers)

Subsidy = Price Received by Sellers – Price Paid by Buyers

Some facts about subsidies:

1.Who gets the subsidy does notdepend on who receives the check from the government;

2.Who benefits from the subsidy doesdepend on the relative elasticities of demand and supply;

3.Subsidies must be paid for by taxpayers and they create inefficient increases in trade(deadweight loss)