regulations increases costs.

A government subsidy, on the other hand, is the opposite of a tax. A subsidy occurs when the government pays

a firm directly or reduces the firm’s taxes if the firm carries out certain actions. From the firm’s perspective,

taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to

produce a lower quantity at every given price. Government subsidies reduce the cost of production and

increase supply at every given price, shifting supply to the right. The following Work It Out feature shows how

this shift happens.

WORK IT OUT

Shift in Supply
We know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output.

What happens to the supply curve when the cost of production goes up? Following is an example of a shift in

supply due to a production cost increase. (We’ll introduce some other concepts regarding firm decision-making in
62 3 • Demand and Supply
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