Explain why a subsidy is inefficient

What will be an ideal response?

A subsidy creates inefficiency because a subsidy leads to a lower price and increased production. Marginal social benefit equals the price and so the lower price signals that the marginal social benefit falls. And the increased production means that the marginal social cost of production rises. So at the level of production with a subsidy, the marginal social benefit is less than the marginal social cost and inefficiency is created.