A subsidy is like a financial 'boost' that governments give to companies to lower their production costs, and in turn, reduce prices and stimulate production of a certain good or service. Think of it as the governments' way of saying, "Hey! We got your back."

For instance, in Malaysia, rice farmers have been receiving a specified amount of money (in Malaysian ringgit) for each ton of rice they harvest since 1980. This helps the farmers reduce their production costs, sell rice at a cheaper price, and encourage them to produce more. Fishing fleets worldwide received an estimated $35 billion in subsidies, mostly on fuel, in 2018 to reduce their costs.

Governments give subsidies for various reasons

• Boosting producer income: Mostly to farmers because people's demand for food doesn't usually increase as their income does. By helping farmers earn more, governments can reduce income inequality and slow down migration from rural to urban areas. This also ensures a consistent food supply and helps lower food prices for low-income households.

  For example, farmers in the European Union receive subsidies to maintain their income level and to ensure Europe's food security.

• Making goods and services more affordable: Subsidies can reduce the price of essential goods and services, such as food, gasoline, public transport, and rent, making them more affordable to lower-income households.

• Promoting industry growth: Subsidies are often given to encourage the adoption of eco-friendly technologies like solar, wind, hydro, and geothermal power. Subsidies played a big role in the growth of the solar panel industry in the US and China.

Let's take Tesla, the renowned electric car manufacturer, as an example. Tesla has received substantial subsidies from the US government, which helped them lower their prices and increase the production of electric cars, encouraging more people to go green.

• Increasing consumption of merit goods: Services like education and healthcare don't just benefit individual consumers, they benefit society as a whole, and subsidies can help increase their consumption.

• Protecting domestic firms: To shield domestic businesses from foreign competition or to make them more competitive internationally, governments often provide subsidies.

Subsidies decrease production costs, thus increasing supply. This causes a rightward shift (or more technically, a vertical downward shift by the subsidy amount) of the supply curve.

Imagine a seesaw, with supply on one side and cost on the other. When cost goes down due to subsidies, supply goes up. Cool, right?

Here's what happens in the rice market, for instance:

• The subsidy shifts the supply curve downwards.
• As a result, the market price for rice decreases, and the amount of rice produced and consumed increases. Farmers also earn more per unit of rice sold - the price consumers pay plus the subsidy.

The government's subsidy cost e

quals the subsidy amount per unit times the new equilibrium quantity.