Saturday, 25 March 2017

Subsidy

The domestic market of good X is described by the equations: Qd = 200 - P & Qs = 20 + 2P. The government decides to intervene in the market in order to protect this infant domestic industry by the imposition of $30 subsidy. What are the consequences to the stakeholders due to the imposition of the subsidy?




The pre subsidy situation is illustrated above. After the subsidy, producers received greater price per unit (Pp) than the price per unit which consumer pay (Pc). More specifically, Pp = Pc + 30. 
Thus, the cost of production is reduced because Q's = 20 + 2(Pc + 30) and the supply curve shifts to the right from Qs = 20 + 2P to Qs' = 80 + 2P.




The conssequences to the different stakeholders are:
1. The consumer surplus increases from $9800 to $12800. This means that the CS increases by $3000.
2. The producer surplus increases from $4800 to $6300. This means that the PS increases by $1500.
3. Government expenditure equals to $4800.
4. Welfare loss equals to GVT expenditure - (CS+PS) = $300.

Indirect Tax (ad valorem)

The domestic market of good X is described by the equations: QD = 200 - P & Qs = 20 + 2P.  The government decides to intervene in the m...