Which of the following best describes a subsidy in microeconomics?

• A. A payment made by the government to producers or consumers to lower the cost of goods or services
• B. A price ceiling set by the government to prevent prices from rising above a certain level
• C. A tax imposed by the government on the sale of goods or services
• D. A regulation that restricts the quantity of goods that can be produced

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of a subsidy in microeconomics. A subsidy is a financial assistance provided by the government to either producers or consumers to encourage production or consumption of a good or service.
2. Step 2: Recognize that a subsidy effectively lowers the cost of producing or purchasing a good or service, making it cheaper for consumers or more profitable for producers.
3. Step 3: Compare the subsidy to other government interventions such as price ceilings, taxes, and regulations. Price ceilings limit how high prices can go, taxes increase costs, and regulations restrict quantities, but none of these directly reduce costs through payments.
4. Step 4: Identify that the correct description of a subsidy is a payment made by the government to producers or consumers to lower the cost of goods or services.
5. Step 5: Conclude that the other options (price ceiling, tax, regulation) do not describe subsidies because they either control prices, increase costs, or limit production rather than providing financial support.