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Unformatted text preview: bigger version for the analysis), consider the following government policy: The government buys all of the initial equilibrium output in this industry, Q , for a price P 1 where P 1 < P and output is positive. Suppose the government takes the output away and uses it outside the country, in a way that doesnt provide any utility to the initial consumers. 1. What happens to producer surplus? 2. What happens to consumer surplus? 3. Now suppose the government instead gives the output to consumers for free, starting with the people who like it most. Discuss what happens to overall welfare. What is the dead-weight loss of the policy? S D P 0 P 1 Q 0 P Q...
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- Winter '07