Which of the following describes a government payment to producers to encourage production of a good?

• A. Tariff
• B. Quota
• C. Tax
• D. Subsidy

Answer: (D)

Subsidy is a government payment to producers to encourage production. When the government pays producers, their costs per unit fall, making it profitable to produce more at each price. In economic terms, this shifts the supply curve to the right, leading to higher quantity supplied. The market price may fall or stay lower than before, depending on how demand responds and how large the subsidy is, but the key effect is that production is encouraged because producers receive extra support.

This differs from a tariff, which is a tax on imports that raises their price to protect domestic producers; a quota, which places a hard limit on how much can be produced or imported; and a tax, which raises costs or reduces demand and tends to discourage production. The description given—government payment to producers to encourage production—matches a subsidy exactly.