What purpose do subsidies serve in an industry?

Subsidies serve primarily to reduce costs and create artificial demand within an industry. By providing financial assistance, governments lower the production costs for businesses, allowing them to sell goods or services at lower prices than they otherwise would be able to. This can stimulate demand among consumers, as lower prices typically increase consumption. The goal of subsidies is often to support specific industries deemed important for economic growth, social welfare, or national security, thereby helping to maintain their viability even in competitive markets.

The first choice, promoting competition among firms, does not accurately reflect the intent of subsidies, as they can lead to market distortions where some firms receive advantages over others. The second choice, increasing the cost of production, contradicts the fundamental purpose of a subsidy, which is to lower costs. The last option, eliminating barriers to entry, reflects a different type of market intervention, where policies may aim to ease the entry of new firms rather than providing ongoing financial support to existing ones.