Buyers pay less; sellers can receive more.
A per-unit producer subsidy lets sellers supply each quantity at a lower buyer price because government pays part of their receipt. Shift supply vertically down by the subsidy. With ordinary downward demand and upward supply, quantity traded rises, buyer price falls and the receipt per unit including subsidy rises.
- Supply
- A per-unit producer subsidy is a government payment to sellers for each eligible unit sold. They can accept less from buyers because government supplies part of the payment, shifting buyer-price supply down.
- Prices
- Seller receipts are money received before paying production costs. Receipt per unit including subsidy = buyer price + subsidy per unit.
- Budget
- Government subsidy spending = subsidy per unit x eligible units actually sold. The per-unit payment is not the total budget cost.
Read the subsidy design
Producer payment
Our core diagram pays sellers per unit sold. A $2 subsidy lets a seller receive $7 while the buyer pays $5, so the supply curve measured at the buyer price lies $2 lower. A fixed grant instead pays a set total that does not vary with current output.
Consumer payment
A subsidy paid to buyers per eligible unit can be represented by higher demand measured at the price sellers receive. Excess demand at the old seller price puts upward pressure on that price and encourages supply. The buyer's net payment subtracts the subsidy from the seller price.
Targeting and capacity
Eligibility means who or what qualifies for support. Even if more units are sold overall, information on the buyers is needed to show whether low-income households gained access. Available staff, facilities and adjustment time also limit delivery.
Worked example: A $2 subsidy per bottle
Use demand P=10-0.05 Q and original supply P=2+0.05 Q, with Q in bottles per day.
- The subsidised buyer-price supply curve is P=0.05 Q: it lies $2 below the original curve.
- At the old buyer price $6, sellers now offer 120 units while buyers demand 80. Excess supply puts downward pressure on buyer price.
- The new intersection is Q=100 and buyer price $5. Sellers receive $5 from buyers plus $2 subsidy, or $7 each.
- Government pays 2x 100=$200. Buyer spending is $500; seller receipts including subsidy are $700.
Watch out for this
The subsidy is government spending of $2 in total.
The rate is $2 per unit. Multiply it by the final quantity that qualifies for payment.
Check your understanding
A seller receives $9 per item including a $3 subsidy. If 50 items sell, what do buyers spend?
- $300
- $450
- $150