Definition
- Subsidy
- A subsidy is a payment from the government to a firm, made directly or through lower taxes, when the firm carries out certain actions.
- Not to be confused with: Indirect tax
- An indirect tax is a tax on spending on goods and services, collected from producers, such as VAT or excise duty.
Test yourself
What is the difference between subsidy and indirect tax?
A subsidy lowers producers' costs and shifts supply down; an indirect tax raises them and shifts supply up.