Unformatted text preview: 4.e. Subsidies A subsidy is when the government gives financial assistance to a person or group because they see it as helping the economy. It increases the demand (as seen by sellers)--which is the opposite effect of a tax. Figure 4.e.1. In Figure 4.e.1. we see a subsidy of $2/unit, this increases the demand curve from D to the after subsidy demand curve (Ds). Cost-Benefit Analysis of Subsidies Suppose that the government subsidizes steel to improve the economy. By doing a cost-benefit analysis we can see what the gains and losses are as a result of this subsidy. Figure 4.e.2. Table 4.e.1.
No subsidy CS PS Govt. spending DWL A+B C+D 0 Subsidy A+B+C+H+G B+C+D+E B+C+E+F+G+H Change +C+H+G +B+E -B-C-E-F-G-H -F In Figure 4.e.2., a subsidy increases the price that sellers receive by the amount of the subsidy, decreases the price buyers pay, and increases the quantity supplied. Both consumers and producers gain as a result of the subsidy, but the government loses money. The net result is a deadweight loss of the area F to the economy. ...
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- Spring '07
- Government, $2, Economics terminology, subsidy demand curve