What is the difference between a tax and a subsidy?

• A. A tax lowers producers' costs and increases supply, while a subsidy raises consumers' costs and decreases demand.
• B. A tax is a voluntary charge used to discourage consumption, whereas a subsidy is an involuntary penalty imposed to raise government revenue.
• C. A tax is a payment from households or firms to the government that raises prices and reduces activity, while a subsidy is a payment from the government to households or firms that lowers prices and increases activity.
• D. A tax and a subsidy are the same tool: both are payments made by the government to private agents to influence market outcomes.

Answer: (C)