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Unformatted text preview: government. They sell until: Pn + Z = W2A or Pn = W2A - Z Thus, the supply curve changes as shown in the diagram below: The effect of the subsidy is that sellers can now charge Z less then their W2A because the government is going to make up the difference. The price falls to Pn and the quantity rises to Qn. Sellers get to keep Pn+Z. The sellers gain area A in new producer surplus. The buyers, who now pay a lower price, gain area B in consumer surplus. However, the total cost of the subsidy to the government is Z*Qn, which is equal to areas A+B+C. The subsidy thus costs C dollars more than the benefits it delivers. It is pareto inefficient, and area C is deadweight loss....
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This note was uploaded on 04/03/2012 for the course ECN 437 taught by Professor Peterwilcoxen during the Spring '12 term at Syracuse.
- Spring '12