📈 Economics

What is the difference between a subsidy and a substitute?

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Answered Nov 17Economics
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Ismail JeilaniBSc Political Economy | Ex-Google | 7 years Teaching Experience

Even though the words sound similar, they are very different. Subsidy: Definition - Money that is given by the government (or other public bodies) to support an industry or organisation. It is usually done to encourage the consumption or production of a good or service. Example 1 - “The Common Agricultural Policy (CAP)“. To encourage European farmers to grow produce, the government will buy excess produce each year at a fixed price. CAP is usually referred to in A-Level Economics so it’s worth having a good understanding of this. Example 2 - Education in the UK is free until the age of 18. This is because the government subsidises the entire cost. Substitute: Definition: If the demand of one good increases (Good X) due to a rise on price of another good (Good Y), this good is a substitute good. Example 1 - When the price of Coke goes up, the demand for Pepsi increases because Pepsi is substitute for Coke. If you found this answer useful, don’t forget to mark it as helpful 🙂