With reference to figure 1, Extract 2 and your own knowledge, discuss the reason for subsidies being paid to Scottish farmers.

A subsidy is a grant given by the government which lowers the price of a good, usually designed to encourage production or consumption of a good.
Subsidies lower production costs, this comes from a decrease in unit cost, and this could possibly come from an investment in capital stock by Scottish farmers, which leads to more efficiency in production, which leads to a decrease in production cost. A decrease in production cost means an increase in supply which means a decrease in price, also a decrease in a price of a good leads to an increase in demand.
The quantity supplied has increased due to lower production costs; this has lead to a decrease in price from P1 to P2.
The quantity supplied has increased due to lower production costs; this has lead to a decrease in price from P1 to P2.

The quantity demanded has increased from Q1 to Q2 due to the reduction in the cost of production, this has increased output.

The quantity demanded has increased from Q1 to Q2 due to the reduction in the cost of production, this has increased output.

Due to lower prices, from a decrease in production, goods from farms such as meat and vegetables have become more affordable for those who could not afford it before; this is mainly referring to the poor. Due to more people being able to afford goods like meat and vegetables, the consumption for these goods will increase, which will lead to an increase in AD, this will cause the multiplier effect to occur. However in 2013 it was recorded 69% of Scottish farmer’s income came from subsidies by the government, this a huge amount, almost too big of a value, this will cause Scottish farmers to become reliant on subsidies, this will reduce efficiency, because they will not care too much on whether the product is of good quality, as in the end they know the government will pay them either way. The government paying large amounts to Scottish farmers means they are using a large amount of their spending money on subsidies in one market, this could lead to a budget deficit, and to recover the deficit the government could increase tax, which have an impact on the economy, could possibly reduce consumption therefore the idea of subsidies may not be effective. Adding on to a budget deficit, the idea of spending a large amount in one market leaves the government with several opportunity costs, this means they are reducing development from one part of the economy to fulfil the Scottish farmers demand for subsidies.