Subsidy

£+  \   /S1 /S2
 +   \ /   /
 +  A x   / 
 +   / \ /
 +  /   x B
 + /   / \
 +    /   \D1
 ++++++++++++++++++++++
0                      QTY

As the subsidy results in some of the production costs being paid for by the government, the producers will be happy to increase their output. This is shown by the expansion of supply from S1 to S2. Assuming that demand remains constant at D1, the equilibrium position will shift from A to B, leading to a lower equilibrium price and higher equilibrium output.

An example of a subsidised industry is farming, where the EU will subsidise uncompetitive farmers to keep them in the market, preventing urban migration.

(thanks to dann for help!!)

Sub"si*dy (?), n.; pl. Subsidies (#). [L. subsidium the troops stationed in reserve in the third line of battlem reserve, support, help, fr. subsidere to sit down, lie in wait: cf. F. subside. See Subside.]

1.

Support; aid; cooperation; esp., extraordinary aid in money rendered to the sovereign or to a friendly power.

They advised the king to send speedy aids, and with much alacrity granted a great rate of subsidy. Bacon.

⇒ Subsidies were taxes, not immediately on on property, but on persons in respect of their reputed estates, after the nominal rate of 4s. the pound for lands, and 2s. 8d. for goods.

Blackstone.

2.

Specifically: A sum of money paid by one sovereign or nation to another to purchase the cooperation or the neutrality of such sovereign or nation in war.

3.

A grant from the government, from a municipal corporation, or the like, to a private person or company to assist the establishment or support of an enterprise deemed advantageous to the public; a subvention; as, a subsidy to the owners of a line of ocean steamships.

Syn. -- Tribute; grant. -- Subsidy, Tribute. A subsidy is voluntary; a tribute is exacted.

© Webster 1913.