Which of the following statements about subsidies is true?

• A. Subsidies result in a higher market price paid by consumers.
• B. Subsidies always decrease consumer surplus.
• C. Subsidies cause the supply curve to shift to the left.
• D. Subsidies generally increase the equilibrium quantity in a market.

Answer: (D)

Verified step by step guidance

1. Understand what a subsidy is: a payment made by the government to producers or consumers to encourage the production or consumption of a good.
2. Recall that a subsidy to producers effectively lowers their production costs, which shifts the supply curve to the right (an increase in supply), not to the left.
3. Analyze the effect of a rightward shift in supply: this typically leads to a lower equilibrium price and a higher equilibrium quantity in the market.
4. Consider consumer surplus: since the price consumers pay usually decreases and quantity increases, consumer surplus generally increases, not decreases.
5. Conclude that subsidies generally increase the equilibrium quantity in a market, making the statement 'Subsidies generally increase the equilibrium quantity in a market' true.