Which best describes what a subsidy does?

• A. It restricts the quantity of a good that can be produced.
• B. It increases the price consumers pay for a good or service.
• C. It imposes a tax on the sale of goods and services.
• D. It lowers the cost of production for producers by providing financial assistance.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a subsidy: A subsidy is a form of financial assistance provided by the government to producers or consumers to encourage the production or consumption of a good or service.
2. Recognize the effect of a subsidy on production costs: Since a subsidy provides financial support, it effectively lowers the cost of production for producers, making it cheaper to produce the good or service.
3. Analyze the impact on supply: Lower production costs typically lead to an increase in supply because producers are willing to produce more at each price level.
4. Distinguish subsidies from taxes: Unlike taxes, which increase costs and reduce supply, subsidies reduce costs and increase supply.
5. Conclude that a subsidy does not restrict quantity, increase consumer prices, or impose a tax, but rather lowers production costs through financial assistance.