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Economics IGCSEPDF 48
118 pagesrevision 46932
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Subsidies – a subsidy is a grant (financial aid) on products that have a positive externality.
Subsidising, for example, cooking gas for the poor, will increase the living standard of the
population. In the diagram below, a subsidy has been imposed on a good, causing its supply to
shift from S to S1. It results in a fall in price from P to P1 and subsequently, an increase in the
quantity traded in the market from Q to Q1.
• Tradable permits – firms will have to buy permits from the government to do something, for
example, pollute at a certain level, and these can be traded among firms. Since permits require
money, firms will be encouraged to pollute less.
• Extension of property rights – one of the main reasons for pollution in public spaces is that it
is public – it does not harm a specific private individual – the resource is the government’s who
cannot charge compensations easily. So the government can extend property rights (right to
own property) of public places to private individuals. This will effectively privatise resources,