Chapter 8_Public economics.pdf - *Public economics*Chapter...

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*Public economics*Chapter 8: Poverty, fiscal incidence and service delivery in South Africa*Redistribution through social spending~In-kind subsidies or grants?Q: With the aid of a diagram, illustrate how a subsidy results in an excess burden or welfare loss.
1-The following points are illustrated in the figure above:1. The initial price and quantity demanded of a specific good (P0 and Q0 at equilibrium E0 in thefigure).2.Assuming constant production costs and that a subsidy is fully passed on to consumers, asubsidy will result in a lower market price.3. In the graph above, this movement is from P0 to P1, with a corresponding increase in thequantity demanded from Q0 to Q1.4. This increases the consumer surplus from the area aP0E0 to aP1E1.

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