How do subsidies affect market equilibrium?

Subsidies primarily aim to decrease the costs of production for businesses, allowing them to produce goods at lower expenses. When a subsidy is introduced, it effectively reduces the marginal cost of production. As a result, suppliers are incentivized to increase their output because they can sell more at lower costs while still maintaining profitability.

This enhanced production capability and the lowered costs are represented graphically by a rightward shift of the supply curve. A rightward shift indicates an increase in supply, which generally leads to a new equilibrium point where the market can achieve a lower equilibrium price and a higher quantity sold. By stimulating supply, subsidies can drive prices down and enable consumers to purchase more goods at a lower cost, benefitting both the producers receiving the subsidies and the consumers buying the products.

In contrast, other options suggest that subsidies would either increase costs or have no impact on the market, which does not align with the economic logic of how subsidies operate. Hence, the correct understanding of subsidies in the context of market equilibrium shows that they serve to lower production costs and shift supply rightward.