econ 211 lecture 10

econ 211 lecture 10 - Econ 211 Lecture 10 Patrick...

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Econ 211 Lecture 10 Patrick McLaughlin There are other ways a government can intervene in a market besides taxes, price ceilings, and price floors. Two more that we’ll study are subsidies and production quotas (different from import quotas). Subsidies A subsidy is a payment made by the government to a producer. A subsidy is just like a negative tax: it is a per-unit payment of some fixed amount, S. It is equivalent to the producer as a decrease in marginal cost. Thus, we just shift the MC downward (increase supply) by the amount of the subsidy. Graph: Revenue for producers increases, but consumer expenditure does not necessarily increase. That depends on the own-price elasticity of demand. If demand is elastic, then expenditure increases; if it’s inelastic, expenditure falls. Revenue now equals (P2*Q2), plus the subsidy, which is worth S*Q2. There is a deadweight loss from overproduction: some people should be doing something else rather than producing in this market. But the subsidy induced them into this market. Quotas
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This note was uploaded on 04/09/2008 for the course ECON 211 taught by Professor Johnson during the Spring '07 term at Clemson.

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econ 211 lecture 10 - Econ 211 Lecture 10 Patrick...

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