Do subsidies to producers always correct market failure? As an essay style question.

Level 1 - definitions of subsidies and highlight what is the market failure (in this case underconsumption of merit goods / positive externalities) and a short answer to the question also lay out how the essay will be structured

Level 2 - give a sort of example of a subsidy to the producers i.e. government paying gym compaines subsidies to stimulate a fall in price and attract demand

Level 3 - talk through with student how to correctly draw a subsidy diagram showing the impact on price, quantity

            - analysis of this diagram including the correct steps (subsidy shifts S to right, causes a fall in price P1-P*), increases consumer surplus, reduces underconsumption, solves the market failure associated with this example.

Level 4 - discuss with student but get them to think of the arguments for and against subsidies i.e. the total subsidy not always passed on to consumers and thus not solving market failure, despite fall in price demand for that good could be elastic, expensive to the government (pportunity cost), Could be used in conjuntion with another policy such as spending on advertising in order to increase demand

allow student to form their own opinion but stress that an argument must be made on one side for the final judgement ie. 'despite these benefits, it is clear that a subsidy does not always correct market failure because... a better solution would be....'