This study presents an industry model developed to analyze the link between targeted production subsidies and excess inventory holdings by using equilibrium displacement modelling. A major question to be investigated is whether a targeted production subsidy can be effective at reducing excess inventory while providing welfare gains to the domestic producers. Monte Carlo simulation results suggest that the policy is expected to achieve its objectives as it improves the welfare of targeted producers and reduces government inventories. The average cost of an increase in the production subsidy to taxpayers would have been 22 percent higher had treasury gains from reduced inventories not been taken into account in the welfare analysis.