E202Exam2.12

E202Exam2.12 - c. Calculate and graph the total economic...

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c. Calculate and graph the total economic surplus lost as a result of the subsidy. Answer : Counting the subsidy payment required, the total economic surplus lost as a result of the subsidy is $75 - $72 = $3. It is the area between the demand and supply curves, and between the new quantity exchanged and the equilibrium quantity. 0.5 ($2.5 - 2) (72 - 60) = 0.5 ($0.5) (12) = $3. Twelve gallons are sold for which people value less than the true cost of production. d. Is it possible for consumer surplus to fall in response to a subsidy? Explain. Answer : Yes, if their other taxes go up to pay for the subsidy by more than they gain due to lower price and higher quantity. For example, if consumers bore the full cost of the subsidy payments to sellers, they would gain $16.50 in the gasoline market but be taxed $36, so lose $19.50. Either consumers or producers must have taxes go up by more than they gain due to the loss is economic surplus. Chapter 8
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