Which of the following correctly describes a subsidy?

• A. A restriction on the quantity of a good that can be imported
• B. A price ceiling set below the equilibrium price
• C. A tax imposed by the government on the sale of a good or service
• D. A payment made by the government to producers or consumers to encourage the production or consumption of a good

Answer: (D)

Verified step by step guidance

1. Understand the definition of a subsidy in microeconomics: it is a payment made by the government to producers or consumers to encourage the production or consumption of a good or service.
2. Review each option and identify its economic meaning: a restriction on quantity is a quota, a price ceiling is a legal maximum price, and a tax is a government charge on sales.
3. Compare these definitions to the concept of a subsidy to see which one matches the idea of a government payment to encourage activity.
4. Recognize that a subsidy lowers the cost for producers or consumers, thereby increasing supply or demand, unlike taxes or restrictions which limit or increase costs.
5. Conclude that the correct description of a subsidy is the option stating it is a payment made by the government to producers or consumers to encourage production or consumption.