Saturday, 25 March 2017

Subsidy

The domestic market of a 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 different stakeholders ?




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...