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Payments made by governments to suppliers to encourage the supply of particular goods. This is common in agricultural markets and goods with environmental benefits.

Below is a diagram to illustrate a market which has had the benefit of a government subsidy. In this instance, the subsidy encourages producers to produce more goods causing the supply curve to outwardly shift. This is because the costs of production have fallen due to the money from the subsidy. However, this creates excess supply so the price has to fall in order for the market to clear and this causes the amount of goods sold to increase as lower prices fuels higher demand.

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