Why Is There Deadweight Loss With A Subsidy? (Solved)

The cost of the subsidy is the responsibility of the government. The cost of providing subsidies is higher than the total gain received by both producers and consumers. This causes inefficiencies in the market and hence leads to the formulation of deadweight loss.

Do all taxes create deadweight loss?

  • Taxes create deadweight losses because the goods (or services or transactions) that they are levied upon are in elastic supply (or demand). This means that the imposition of the tax causes a change in the quantity supplied (or demanded) as well as a change in price.

Why is there a deadweight loss associated with subsidy?

Subsidy payments will lead to larger production and supply of goods in the market, causing excess supply. Also, the consumers are willing to pay less on a subsidized product, which is even lower than the marginal cost of manufacturing, causing the deadweight loss in the market.

Does a subsidy create a deadweight loss Why or why not quizlet?

No. Although the cost of a subsidy is typically​ large, there is no deadweight loss because it only occurs in the case of underproduction. A subsidy increases the equilibrium quantity relative to the​ free-market quantity.

What is the deadweight loss caused by the subsidy quizlet?

A subsidy causes deadweight loss: only because of inefficient increases in trade. only because of unexploited gains from trade. because of both inefficient increases in trade and the unexploited gains from trade.

Why is a subsidy inefficient?

A subsidy generally affects a market by reducing the price paid by buyers and increasing the quantity sold. Subsidies are usually pareto inefficient because they cost more than they deliver in benefits. Thus, the supply curve changes as shown in the diagram below: The price falls to Pn and the quantity rises to Qn.

Why do governments give subsidies?

When market imperfections exist, it is the right of governments to use subsidies to palliate those that are ill-advantaged. For example, in a low-monetized economy, subsidies can achieve more efficient social policy – it may be easier to slash food staple prices to consumers than to make social transfers.

What does welfare loss represent?

Welfare loss of taxation refers to a decrease in economic and social well-being caused by the imposition of a new tax. It is the total cost to society incurred just by the process of transferring purchasing power from taxpayers to the taxing authority.

Who benefits more from a subsidy?

Producer Impact of a Subsidy Therefore, producers are made better off by the subsidy. In general, consumers and producers share the benefits of a subsidy regardless of whether a subsidy is directly given to producers or consumers.

Who benefits from a subsidy depends on?

Q2: Who benefits from a subsidy depends on: – the relative elasticities of demand and supply.

How is it that a tax creates a deadweight loss by decreasing quantity but a subsidy creates a deadweight loss by increasing quantity quizlet?

When demand is more elastic than supply, suppliers bear more of the burden of a tax + receive more of benefit of a subsidy. Taxes decrease quantity traded, subsidies increase quantity traded, both taxes and subsidies create deadweight loss.

How do government subsidies affect supply?

When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services. This increases the overall supply of that good or service, which increases the quantity demanded of that good or service and lowers the overall price of the good or service.

What is economic subsidy?

Key Takeaways. A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut. In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.

What is the effect of a subsidy being placed on the market quizlet?

Subsidies have the effect of increasing revenues of producers. “Subsidies are used to make necessities affordable for low-income consumers.” Subsidies have the effect of lowering the price that is paid by consumers of a good. Subsidy will allow a producer to produce more of a good, and hence more is consumed.

What are the disadvantages of subsidies?

Subsidies have disadvantages, including the possibility of shortages of goods. One of the advantages of subsidies is the greater supply of goods. Due to lowered prices, a sudden increase in demand can be difficult for many producers to meet, resulting in a sudden rise in prices.

How does subsidy affect equilibrium?

A subsidy will shift the supply curve to the right and therefore lower the equilibrium price in a market. The aim of the subsidy is to encourage production of the good and it has the effect of shifting the supply curve to the right (shifting it vertically downwards by the amount of the subsidy).

What is the effect of a subsidy?

The effect of a subsidy is to shift the supply or demand curve to the right (i.e. increases the supply or demand) by the amount of the subsidy. If a consumer is receiving the subsidy, a lower price of a good resulting from the marginal subsidy on consumption increases demand, shifting the demand curve to the right.

Does a subsidy create a deadweight loss? Why or why not? A. No. Consumers and producers gain surplus, while the cost of the subsidy is minimal. In fact, a subsidy often results in a net gain in welfare. B. No. Although the cost of a subsidy is typically l

Is it true that a subsidy results in a deadweight loss? What is the reason for this or why is it not? No, not at all. Consumers and producers both benefit from the subsidy, and the cost of the subsidy is modest. In reality, a subsidy is frequently associated with a net increase in welfare. B. No, not at all. The cost of a subsidy is normally high, but it does not result in deadweight loss because it only happens in the situation of underproduction. An increase in equilibrium quantity as compared to the free-market amount is known as a subsidy.

Yes, absolutely.

The cost of the subsidy is equal to the difference between the subsidized equilibrium quantity and the free-market quantity multiplied by the amount of the subsidy per unit.

Yes, absolutely.

It is calculated by multiplying the subsidized equilibrium quantity, which is lower than the free-market quantity, by the subsidy per unit of production.

Subsidy

Subsidies are grants made by the government to individuals, corporations, and other organizations; they can be monetary or non-monetary in nature. Subsidies can be either monetary or non-monetary in nature. The primary goal of subsidization is to make items more inexpensive.

Answer and Explanation:1

The correct response is option c. Yes, even while producers and consumers benefit from the subsidy, the cost of the subsidy outweighs the benefit. It is calculated by multiplying the subsidized equilibrium amount, which is greater than the free-market quantity multiplied by the subsidy per unit, by the cost of the subsidy. A government subsidy to either the consumer or the producer has a favorable influence on both parties, depending on their elasticities, and the positive impact of the subsidy is split between them.

The government is responsible for the costs associated with the subsidy program.

As a result, there are inefficiencies in the market, which leads to the derivation of the term “deadweight loss.” The equilibrium quantity of the good is bigger than the equilibrium quantity that prevails in the free market when the subsidy is in effect.

Understanding Subsidy Benefit, Cost, and Effect on the Market

In most cases, we are all familiar with the concept of “per-unit tax,” which is a quantity of money that the government takes from either producers or consumers for each unit of commodities that is purchased and sold. The term “per-unit subsidy” refers to the amount of money that the government provides to either producers or consumers for every unit of products that is purchased and sold. From a mathematical standpoint, subsidies operate similarly to a negative tax. Whenever a subsidy is in place, the entire amount of money that is received by the producer for the sale of products is equal to the total amount of money that is paid by consumers plus the amount of the subsidy.

To put it another way, the amount a customer pays for products is equal to the total of the amounts received by the producer and subtracted from that sum is the subsidy. The following is an example of how a subsidy influences market equilibrium:

Market Equilibrium Definition and Equations

Jodi Beggs is a singer and songwriter. To begin, what exactly is market equilibrium? It is said that market equilibrium has occurred when the amount of goods provided in a market (represented by Qs in this equation) equals the quantity demanded in a market (QD in the equation). In order to find the market equilibrium produced by a subsidy on a graph, these equations must be used in conjunction with another equation or two.

Market Equilibrium With a Subsidy

Jodi Beggs is a singer and songwriter. When a subsidy is implemented, a handful of considerations must be kept in mind in order to determine market equilibrium. In the first place, the demand curve is a function of the price that a consumer pays out of pocket for an item (Pc), since the price that consumers pay out of pocket for a good impacts their consumption decisions. Second, the supply curve is a function of the price that a producer receives for a good (Pp), since the amount received by a producer impacts the incentives that the producer has to create the commodity.

More exactly, the quantity at which the corresponding price to the producer (as determined by the supply curve) equals the price that the consumer pays (as determined by the demand curve) plus the amount of the subsidy is the equilibrium quantity with the subsidy.

Consequently, we might infer that subsidies enhance the number of goods purchased and sold in a market.

Welfare Impact of a Subsidy

Jodi Beggs is a singer and songwriter. The economic impact of a subsidy should not only be considered in terms of its influence on market prices and quantities, but it should also be considered in terms of its direct impact on the welfare of consumers and producers in the market. Consider the regions labeled A-H on the figure above as a starting point. Regions A and B combined reflect consumer surplus in a free market, since they represent the additional advantages that consumers in a market obtain from an item that are in addition to and above the price that they pay for it.

The whole surplus, or the overall economic value generated by this market (also known as the social surplus) is equal to the sum of the following four factors: A, B, C, and D.

Consumer Impact of a Subsidy

Jodi Beggs is a singer and songwriter. When a subsidy is implemented, the calculations of consumer and producer surpluses get a little more difficult, but the basic rules remain the same. Consumers receive the area over and below the price that they pay (Pc) and above and below their value (which is determined by the demand curve) for all of the units that they purchase in the market.

This area is represented by the letters A + B + C + F + G on the figure. As a result of the subsidies, customers are better off as a result of it.

Producer Impact of a Subsidy

Jodi Beggs is a singer and songwriter. The area between the price they get (Pp) and the price above their cost (which is determined by the supply curve) for all of the units that they sell in the market is calculated for producers in the same way as for consumers. On the figure, this area is represented by the letters B, C, D, and E. As a result of the subsidies, manufacturers are in a better financial position. In general, consumers and producers participate in the advantages of a subsidy, regardless of whether the subsidy is directed directly to producers or consumers in the first instance.

The relative elasticities of producers and consumers determine which party gains the most from a subsidy, with the more inelastic side reaping the most advantage.

Cost of a Subsidy

Jodi Beggs is a singer and songwriter. Whenever a subsidy is implemented, it is critical to evaluate not just the impact of the subsidy on consumers and producers, but also the amount of money that the subsidy will cost the government and eventually the taxpayers. As shown by this equation, if the government offers a S subsidy on each unit purchased and sold, the total cost of the subsidy is equal to S times the equilibrium amount present in the market at the time the subsidy is implemented.

Graph of Cost of a Subsidy

Jodi Beggs is a singer and songwriter. To illustrate the entire cost of the subsidy graphically, a rectangle may be drawn with a height of S and a width equal to the equilibrium quantity of goods purchased and sold while benefiting from the subsidy (see Figure 1). A rectangle of this type is seen in this picture, and it may also be represented by the letters B + C + E + F + G + H. It makes sense to conceive of money that is paid out by an organization as negative revenue since revenue reflects money that is brought into the company.

As a consequence, the “government revenue” component of the overall surplus is provided by -(B + C + E + F + G + H) where B is the number of government revenues.

Deadweight Loss of a Subsidy

Jodi Beggs is a singer and songwriter. It is concluded that subsidies result in economic inefficiency, also known as deadweight loss, because the overall surplus in a market under a subsidy is smaller than the total surplus in a free market. This graphic depicts the deadweight loss as area H, which is the shaded triangle to the right of the free market quantity (as shown in the diagram).

When a government provides a subsidy, it promotes economic inefficiency because it costs the government more money to implement the subsidy than the subsidy generates in additional benefits for consumers and producers.

Are Subsidies Bad for Society?

However, despite the seeming inefficiency of subsidies, it is not always the case that subsidies constitute inefficient public policy. When positive externalities are present in a market, subsidies, on the other hand, might increase rather than decrease the total surplus. Furthermore, when considering fairness or equality problems, as well as markets for needs like as food or clothes, where cost rather than product appeal is the primary constraint on desire to pay, subsidies might make sense.

Why is there a deadweight loss associated with subsidy payments? A) There is no deadweight loss from a subsidy. B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer pro

What causes a deadweight loss connected with subsidy payments, and how may it be avoided? A) There is no deadweight loss as a result of receiving a subsidy. B) Because the quantity provided is smaller than the equilibrium amount, both consumers and producers suffer a loss of surplus value on the units that are no longer manufactured. C) The quantity of goods provided exceeds the equilibrium amount, and the willingness of consumers to pay for these additional units is less than the marginal cost of production for these additional units.

Deadweight Loss

A deadweight loss is defined as a societal cost that has happened as a result of inefficiencies in the marketplace. In other words, it is a sort of circumstance in which demand and supply are out of balance in the marketplace.

Answer and Explanation:1

In this case, the proper choice is C): the quantity offered exceeds the equilibrium amount, and customer willingness to pay for these additional units is lower than the equilibrium amount. See the complete response below for more information.

Effect of a Subsidy

In most cases, a subsidy has an impact on a market by lowering the price paid by buyers and raising the number of goods supplied. Subsidies are often inefficient in the sense that they cost more than they provide in terms of net benefits. To see why, consider a market that is not subsidized. The market would attain an equilibrium when the demand curve crosses the pre-tax supply curve, which is determined by the sellers’ willingness to accept a lower price than they were willing to pay previously (W2A).

  • The following is a representation of the equilibrium on a graph: Consider the following scenario: the government decides to subsidize sellers by giving them Z dollars per unit sold.
  • Pn + Z = W2A or Pn = W2A – ZTherefore, the supply curve shifts as indicated in the image below: Pn + Z = W2A As a result of the subsidy, retailers may now charge Z less than their W2A since the government will make up the difference between the two.
  • Pn+Z is retained by the sellers.
  • The purchasers, who are now paying a cheaper price, benefit from the increase in consumer surplus in region B.
  • As a result, the subsidy is more expensive in C dollars than the advantages it provides.

It is inefficient according to the Pareto principle, and area C represents deadweight loss. AdminURL: Peter J Wilcoxen, The Maxwell School at Syracuse University. Site Index| Zoom| AdminURL: The most recent revision was made on August 17, 2016.

Deadweight loss – Wikipedia

Because of a bindingprice ceiling, there is a deadweight loss. However, although the producer surplus is constantly decreasing, the consumer surplus is either increasing or remaining constant; however, the drop in producer surplus must be higher than the gain in consumer surplus, if any. A measure of lost economic efficiency when the socially ideal quantity of an item or a service is not produced is known as deadweight loss, also known as excess load, or simply excess burden. When wealth and income are substantially concentrated (economic inequality), monopoly pricing in the case of artificial scarcity, a positive or negative externality, a tax or subsidy, or a bindingprice ceilingorprice floor (such as an hourly minimum wage), non-optimal output might result.

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Examples

Assume that there is a nail market, and that the cost of each nail is $0.10. Nail demand drops linearly; there is a significant demand for free nails, but no desire for nails at a price per nail of $1.10 or above; there is no demand for nails at any other price. In a competitive market, the price of $0.10 per nail reflects the point of equilibrium in terms of economics.

Monopoly

Assuming perfect competition prevails in the market, manufacturers would charge a price of $0.10, and every buyer whose marginal benefit exceeded $0.10 would purchase a nail from the producer. This product is often produced by a monopoly producer that charges whatever price would result in the highest profits for themselves while minimizing the amount of efficiency lost by the economy as a whole. According to this scenario, the monopoly manufacturer costs $0.60 per nail, thereby shutting out every client who receives a marginal benefit less than $0.60 from the market.

The monopolist has effectively “priced them out of the market,” despite the fact that their benefit surpasses the genuine cost of a nail in the market.

Subsidy

Deadweight loss, on the other hand, might result from customers purchasing more of a product than they would have otherwise based on their marginal benefit and the cost of production. For example, if the government offered a $0.03 subsidy for every nail produced in the same nail market, the subsidy would drop the market price of each nail to $0.07, despite the fact that the cost of production is still $0.10 per nail. Nails would be purchased by consumers who receive a marginal advantage ranging between $0.07 and $0.10 per nail, despite the fact that their benefit is less than the true production cost of $0.10.

Tax

A tax has the inverse effect of a subsidy in terms of impact. In contrast to a subsidy, which encourages consumers to purchase a product that would otherwise be too expensive for them in light of their marginal benefit (the price of the product is lowered to artificially increase demand), a tax discourages consumers from purchasing a product that would otherwise be too expensive for them (price is increased to artificially lower demand). The lost usefulness for the customer is represented by the additional burden of taxation.

For example, “sin taxes” applied against alcohol and cigarettes are meant to artificially diminish demand for these commodities; some would-be consumers are priced out of the market, resulting in a reduction in overall smoking and drinking.

Indirect taxation (VAT) burdens the consumer, yet it does not result in a reduction in surplus for the producer.

When major companies such as firms or manufacturers pay indirect taxes, the burden is partially passed to the individual consumer.

Furthermore, indirect taxes can either be charged and collected at a single step of the manufacturing and retail process, or they can be charged and collected at numerous stages of the whole production process of a commodity, depending on the circumstances.

Harberger’s triangle

The deadweight loss is defined as the size of the triangle formed by the right edge of the grey tax income box, the original supply curve, and the demand curve, all of which are parallel to the supply curves. The triangle is referred to as Harberger’s triangle. Generally credited to Arnold Harberger, Harberger’s triangle depicts the deadweight loss (as assessed on a supply and demand graph) associated with government intervention in a perfectly competitive market (see figure). Price floors, ceilings, taxes, tariffs, and quotas are some of the mechanisms available for this type of intervention.

A government tax creates a wedge between what consumers pay and what producers get, and the area of this wedge shape is equal to the deadweight loss induced by the tax.

The triangle represents the region created by the fact that the junction of the supply and demand curves has been reduced in size by a factor of two.

It’s the loss of such surplus that can never be recovered that’s referred to as deadweight loss.

Hicks vs. Marshall

If we are talking about deadweight loss, it is important to distinguish between theHickeyan(as defined by John Hicks) and theMarshalllian(as defined by Alfred Marshall) demand functions. After taking into account the consumer surplus, it can be demonstrated that the Marshallian deadweight loss is zero if demand is perfectly elastic and supply is perfectly inelastic, respectively. As a result, Hicks conducted an analysis of the situation using difference curves and discovered that when the Marshallian demand curve is perfectly inelastic, the policy or economic situation that caused the distortion in relative prices has a substitution effect, which means that it results in a deadweight loss for the economy.

The deadweight loss can be calculated as the difference between the equivalent variation and the amount of revenue raised by the taxation.

However, that is not the only interpretation, and Lind and Granqvist (2010) point out that Pigou did not discuss deadweight loss in terms of a lump sum tax as a point of reference, as is commonly assumed (excess burden).

Deadweight loss of taxation

The tax increases the price paid by purchasers toPc and decreases the price received by sellers toPp, resulting in a reduction in the amount sold from Qe to Qt, resulting in the Deadweight loss of taxation. When a tax is imposed on buyers, the demand curve changes downward in proportion to the amount of the tax charged on the purchasers. Furthermore, when a tax is placed on sellers, the supply curve changes higher by the amount of tax charged on them. Whenever a tax is applied, the price paid by purchasers goes up, while the price received by sellers goes down.

  • Because a tax creates a “wedge” between the prices that purchasers pay and the prices that sellers get, the number of goods sold is lowered below the amount that it would be if the tax were not imposed.
  • Consider the following scenario: Will is a cleaner who works for a cleaning service firm, and Amie has hired Will to clean her room once a week for $100.
  • As a result, they each receive the same amount of gain from their transaction.
  • However, if the government were to decide to impose a $50 tax on the suppliers of cleaning services, their industry would no longer be profitable for them to operate in.
  • It is as a result of this that not only do Amie and Will both walk away from the transaction, but Amie also has to live in a filthy house and Will does not receive the money that he desires.
  • The government’s revenue is also affected by this tax: because Amie and Will have backed out of the arrangement, the government loses any tax money that would have been generated by the salary they would have received.
  • The result is a decrease in government income as well as losses for both buyers and sellers in a market.
  • When looking at the graph, the deadweight loss may be observed as a shaded region that exists between the supply and demand curve.
  • For reasons explained in the preceding example, when the government levies a tax on taxpayers, that tax raises the amount of money paid by purchasers toPcand reduces the amount of money received by sellers toPp.

Buyers and sellers (Amie and Will) agree to terminate the transaction and withdraw from the market. As a result, the amount of merchandise sold decreases from Qe to Qt. The deadweight loss happens as a result of the tax deterring these types of beneficial exchanges from taking place in the market.

Determinants of deadweight loss

The price elasticities of supply and demand determine whether the deadweight loss from a tax is significant or insignificant, respectively. This metric quantifies the extent to which changes in price have an impact on the amount provided and the quantity desired. As an example, if the supply curve is very inelastic, the amount of goods provided responds only marginally to changes in price. When the supply curve is more elastic, on the other hand, the amount provided responds considerably to changes in the price of the good.

  1. In a similar vein, when the demand curve is highly inelastic, the deadweight loss from the tax is less as compared to when the demand curve is somewhat elastic.
  2. When the price of goods and services rises as a result of the tax, buyers tend to spend less.
  3. Consequently, the entire size of the market shrinks below the level of the best-case equilibrium.
  4. Increases in the elasticities of supply and demand are accompanied by an increase in the deadweight loss caused by a tax.

How deadweight loss changes as taxes vary

Changes in taxation can be made by the government or policymakers at various levels of government. For example, when a low tax rate is implemented, the deadweight loss is likewise minimal (compared to a medium or high tax). The fact that the deadweight loss resulting from a tax grows more quickly than the tax itself is an essential issue; hence, the area of the triangle representing the deadweight loss is computed using the square of its size. When a tax is raised in a linear fashion, the deadweight loss grows in proportion to the square of the tax increase.

  1. As a result, increasing the tax by a factor of four increases the deadweight loss.
  2. The area of the rectangle drawn between the supply and demand curves represents the amount of tax money generated.
  3. As the magnitude of the tax grows, so does the amount of money collected in taxes.
  4. The increased tax diminishes the overall size of the market; even while taxes are taking a bigger share of the “pie,” the overall size of the pie is lowered as a result of the increased tax.

As in the nail example above, if the market for a good continues to grow beyond a certain point, it will eventually contract to zero.

Deadweight loss of a monopoly

Monopolies suffer from deadweight loss in the same manner that taxes suffer from deadweight loss. When a monopoly, acting as a “tax collector,” charges a price above marginal cost in order to solidify its dominance, it creates a “wedge” between the costs borne by the customer and the costs borne by the provider. In addition to distorting market outcomes, the wedge effect results in a drop in the number of goods sold, which is below the socially optimal level of production. What should be kept in mind is that, in contrast to legitimate taxes, monopoly profits are collected by a private company, whereas the government receives the income from a true tax.

See also

  • In the same manner that taxes induce deadweight loss, monopolies result in deadweight loss as well. Whenever a monopoly, in the role of “tax collector,” charges a price above marginal cost in order to cement its control, it creates a “wedge” between the costs borne by the customer and the costs borne by the provider. In addition to distorting market outcomes, the wedge effect results in a decline in the number of goods sold, which is below the socially optimal level of output. What should be kept in mind is that, in contrast to legitimate taxes, monopoly profits are collected by a private company, whilst the government receives the money from genuine taxes.

References

  1. This is referred to as “Negative Externality.” Gruber, Jonathan (February 11, 2012)
  2. Retrieved February 11, 2012. (2013). Public Finance and Public Policy are two topics covered in this course. Worth Publishers, New York, ISBN 978-1-4292-7845-4
  3. AbcdeN. Mankiw-David Hakes, New York, ISBN 978-1-4292-7845-4
  4. (2012). Microeconomic principles are covered in this course. Cengage Learning in the South-Western United States

Further reading

  • Case, Karl E.
  • Fair, Ray C. Case, Karl E.
  • Fair, Ray C. (1999). Economic Principles are a set of rules that govern how things work in the world (5th ed.). Hines, James R., Jr., Prentice-Hall, ISBN 978-0-13-961905-2
  • Hines, James R., Jr. (1999). “Three Sides of Harberger Triangles” is an abbreviation for “Three Sides of Harberger Triangles” (PDF). Lind, H., and Granqvist, R. (2013). Journal of Economic Perspectives, vol. 13, no. 2, pp. 167–188. doi: 10.1257/jep.13.2.167
  • Lind, H., and Granqvist, R. (2010). Notes on the Concept of Excess Burden are presented in this paper. doi: 10.1016/S0313-5926(10)50004-3
  • Economic Analysis and Policy, vol. 40, no. 1, pp. 63–73

External links

  • The Canadian initiative “Too much stuff: the deadweight loss from overconsumption” is well worth supporting.

4.7 Taxes and Subsidies – Principles of Microeconomics

Topic 4: Supply and Demand in Practical Situations, Part 2

Learning Objectives

You will be able to do the following by the conclusion of this section:

  • Distinguish between the incidence of legal and economic taxes. Be familiar with how to depict taxes using the shifting curve and the wedge approach
  • Understand how a tax affects the quantity and price of a product
  • Give an explanation of how taxes and subsidies result in deadweight loss.

Despite the fact that taxes are not the most popular policy, they are frequently required. By changing the curve and utilizing the wedge approach, we will be able to better understand how taxes influence the market and how to mitigate their effects. First and foremost, we must distinguish between the incidence of legal taxation and the incidence of economic taxation.

Legal versus Economic Tax Incidence

When the government establishes a tax, it must choose whether the tax will be levied against producers or against consumers. This is referred to as “legal tax incidence.” Consumer-facing taxes such as the Government Sales Tax (GST) and Provincial Sales Tax (PST) are among the most well-known types of taxes (PST). In addition, the government imposes levies on manufacturers, such as the gas tax, which reduces their profit margins. When identifying who is effected by a tax, the legal incidence of the tax is essentially immaterial to the decision.

In the same way, a tax on consumers would eventually diminish the quantity required and the excess produced by producers.

Tax – Shifting the Curve

As discussed in Topic 3, we discovered that the supply curve was formed from a firm’s Marginal Cost and that variations in the supply curve were produced by any changes in the market that resulted in an increase in MC across the board. This is no different in the case of a tax. From the point of view of the producer, every tax imposed on them is just an increase in the marginal costs per unit produced. Examine the oil market once more to see how a tax would have an impact on the market. Suppose the government imposes a $3 gas tax on producers (a legitimate tax incidence on producers), the supply curve will move up by $3 as a result of the tax.

It should be noted that producers no longer earn $5; instead, they now receive only $2, as $3 must be given to the government.

Imagine that the legal incidence of the tax is placed on the customers, as seen in Figure 4.7a.

For example, if customers are only ready to pay $4/gallon for 4 million gallons of oil but are aware that they would be charged a $3/gallon tax at the pump, they will only purchase 4 million gallons of oil if the ticket price is just $1.

The $2 that was paid to the producers before taxes will be returned to them. The end consequence is the same regardless of whether the tax is charged on the consumer or on the producer, demonstrating that the legal incidence of the tax is unimportant.

Tax – The Wedge Method

Another way to look at taxes is via the lens of the wedge approach. As a result of this strategy, it is recognized that who pays the tax is ultimately immaterial. As opposed to this, the wedge approach explains how a tax creates a wedge between the price consumers pay and the revenue producers get that is proportional to the amount of tax charged. As seen in the illustration below, finding the new equilibrium is as simple as finding a $3 wedge between the two curves. Only $0.7 is tried for the first wedge, followed by $1.5, and so on until the $3.0 tax is discovered.

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Market Surplus

In the same way that price and quantity restrictions must be compared before and after a price change in order to properly appreciate the impact of a tax policy on surplus, one must compare the market surplus before and after a tax policy change. Figure 4.7d (right)

Before

The market surplus prior to the tax has not been indicated, although this should be a normal part of the process. Make certain you understand how to obtain the values shown below: Consumer surplus is equal to $4 million. 8 million dollars in producer surplus Market Surplus is equal to $12 million.

After

Based on this illustration, the market surplus following implementation of policy may be computed. Consumer Surplus (in the blue area) equals $1 million dollars. Producer Surplus (in the red area) equals $2 million. Revenue from the government (in the green area) = $6 million Market Surplus is equal to $9 million.

Why is Government Included in Market Surplus

We did not include any mention of government revenue in our earlier examples dealing with market excess since the government was not participating in our market at the time of writing. Keep in mind that market excess is our yardstick for measuring efficiency. Without consideration for the government, this statistic would be of limited use. For the sake of this example, a million-dollar loss to the government would be considered efficient if it resulted in a one-dollar benefit to the general public.

  • As was the case with the quota, a reduction in quantity resulted in a drop in both consumer and producer surplus.
  • It is this time when consumers and producers are the ones who are being redistributed to the government.
  • Price adjustments merely rebalance the distribution of excess among consumers, producers, and the government.
  • Figure 4.7e (right)

Transfer – The Impact of Price

The price effect of the tax causes regions A and C to be moved from consumer and producer surplus to government income as a result of the tax’s influence on prices. Bringing Consumers to the Government – Area A Gasoline was initially priced at $4 per gallon for consumers. They are now spending $5 per gallon of gasoline. The $1 rise in price represents the part of the tax that consumers are responsible for paying out of pocket. Despite the fact that the tax is charged against producers, consumers are still required to shoulder a portion of the price increase.

This is due to the fact that a drop in the price to producers implies a decrease in the quantity provided, and in order to preserve equilibrium, the quantity required must reduce by an equivalent amount.

Because of this pricing shift, the government will collect $1 x 2 million gallons, or $2 million, in tax income from customers in the next fiscal year. Essentially, this is a direct transfer from consumers to the government, and it has no impact on the market surplus.

Producers to Government – Area C

In the beginning, gas producers earned a $4-per-gallon income share. They are now paid $2 per gallon of gasoline. This $2 reduction represents the share of the tax that manufacturers are responsible for paying. This means that the government receives $2 million in tax income from the manufacturers for every 2 million gallons of product produced. A shift of wealth has occurred from producers to the government. According to the government’s calculations, it obtains a total of $6 million in tax money, which is collected from consumers and manufacturers.

The Implications of Quantity on Deadweight Loss Deadweight loss would not exist if we just evaluated a transfer of surplus as a possible solution.

When customers pay a higher price, they want fewer items, and when producers pay less, they supply fewer items, resulting in a decline in the amount of merchandise available for sale.

Consumer Surplus Decrease – Area B

A significant number of customers will abandon oil in favor of other fuels as a result of the price hike. The reduction in quantity demand of 1.5 million gallons of oil results in a deadweight loss of $1 million in terms of oil. Producer Surpluses are declining – In addition, producers in Area Dwill reduce the amount of oil they supply by 1.5 million gallons per year because they would now only earn $2.00 per gallon for their output. Not by chance, the magnitude of the drop is the same on both occasions.

  • It is important to remember that the amount requested must equal the quantity provided in order for the market to stay stable.
  • Take note, however, that the consequence of this quantity reduction results in a greater fall in producer surplus than consumer surplus, resulting in a $2 million decline in producer surplus.
  • Together, these reductions result in a $3 million reduction in deadweight (the difference between the market surplus before and market surplus after).
  • It is a benefit provided by the government to organisations or people, and it is typically in the form of a cash payment or a tax deduction.
  • In economic terms, a subsidy acts as a wedge, lowering the price consumers pay while raising the price producers get, resulting in a net loss for the government.
  • Many regulations have been created in reaction to this, allowing low-income families to remain homeowners despite their financial circumstances.
  • Please note that the following policy is impractical, but it provides for a straightforward understanding of the effect of subsidies.
  • The government wants to significantly expand the number of customers who can afford to buy a home, so it offers a $300,000 subsidy to everyone who purchases a new home during the current fiscal year.
  • Across all of the government initiatives we’ve looked at so far, we’ve tried to figure out whether the policy has had an effect on either increasing or decreasing the market surplus.

Unfortunately, as the amount of surplus overlap on our diagram rises, the situation becomes more difficult. To make the study easier to understand, the following figure divides the changes in producers, consumers, and the government into three independent plots. Figure 4.7g (High Resolution)

Producers

Producers will now get $550,000 instead of $400,000, resulting in an increase in the quantity of food delivered to 60,000 households. Areas A and B see an increase in producer surplus as a result of this.

Consumers

Consumers now pay $250,000 instead of $400,000, resulting in an increase in the number of dwellings required to 60,000. This enhances consumer surplus in the areas covered by Cand D’s research.

Government

This idea would cost the government $18 billion and require the government to pay $300,000 per property in order to subsidize the 60,000 customers who are purchasing new homes. In terms of numbers, this corresponds to a reduction in government spending in areas A, B, C, D, and E.

Result

These are the regions where we anticipate total benefits from the policy (to producers and consumers), whereas the areas where we anticipate entire losses (the cost to the government) are areas A, B, C, D and E. To sum it all up: Specifically, the government transfers control of Areas A, B, C, and D to consumers and producers. Area E represents a deadweight loss resulting from the policy. There are two points to take note of in this particular scenario. First and foremost, the program was effective in increasing the number of residences built from 40,000 to 60,000.

It’s important to remember that if a quantity is moved from its equilibrium value, in the absence of externalities, there is a deadweight loss.

Summary

A taxation or subsidization scheme is more complex than a pricing or quantity control scheme due to the involvement of a third economic player: the government. As we have shown, who is subjected to a tax or subsidy is immaterial when analyzing how the market ultimately performs. Take note that the past three sections have given a bleak picture of the effectiveness of policy tools. This is due to the fact that our model does not yet account for the external costs that economic players impose on the macro-environment (pollution, sickness, and so on), nor does it assign any significance to equality.

For the reasons stated above, we may conclude that the legal incidence of the tax does not important; but, what does?

Glossary

Economic Tax Incidence is the distribution of tax depending on who bears the burden in the new equilibrium, which is determined by the elasticity of the new equilibrium market. Legal Tax Incidence refers to the legal allocation of who is responsible for paying the tax.

Subsidy is a benefit provided by the government to organisations or people, and it is typically in the form of a monetary transfer or a decrease in taxation. It is frequently done in order to relieve some form of burden, and it is frequently deemed to be in the general public’s best interests.

Exercises 4.7

Depending on the elasticity of the new equilibrium, economic tax incidence is the distribution of tax based on who pays the burden. Legal Tax Incidence refers to the legal distribution of who is responsible for paying the tax and how much. It is a government benefit that is granted to groups or people, and it is generally in the form of a cash payment or tax reduction. It is frequently done in order to relieve some form of burden, and it is frequently deemed to be in the best interests of the general public in order to accomplish this goal.

does a subsidy create a deadweight loss? why or why not?

It has the effect of shifting the supply or demand curve to the right (in other words, increasing either supply or demand) by an amount equal to the amount of the subsidy. … Subsidies aimed towards commodities produced in a single nation decrease the price of such items, making them more competitive against goods produced in other countries and, as a result, lessening foreign competition A subsidy will cause the supply curve to move to the right, resulting in a decrease in the equilibrium price in a market.

Why are subsidies bad for the economy?

Subsidies have a negative impact on the economy because they cause efficiency losses, which have a negative impact on GDP and growth. As a result, subsidies that are conditional on levels of input consumption or production levels sometimes leak away to industries other than the ones that were originally meant to benefit from the subsidy.

How does a subsidy create a deadweight loss by increasing quantity?

The government is responsible for the costs associated with the subsidy program. The cost of giving subsidies is more than the entire gain realized by both producers and consumers as a result of the subsidies. As a result, there are inefficiencies in the market, which leads to the derivation of the term “deadweight loss.”

Who benefits from a subsidy depends on?

Q2: Who receives a subsidy is determined by the following factors: –the relative elasticities of demand and supply

How is it that a tax creates a deadweight loss by decreasing quantity but a subsidy creates a deadweight loss by increasing quantity quizlet?

Whenever demand is more elastic than supply, providers suffer a greater share of the tax burden while also receiving a greater share of the gain from a subsidy. Taxes reduce the amount of goods and services exchanged, subsidies increase the amount of goods and services sold, and both taxes and subsidies result in deadweight loss.

How do subsidies affect the economy?

When market flaws exist, governments have the authority to employ subsidies to alleviate the plight of individuals who are unfairly disadvantaged. For example, in a low-monetized economy, subsidies can be used to accomplish more efficient social policy– for example, it may be easier to lower the costs of food staples for consumers than it is to implement social transfer programs.

Why are subsidies used?

Subsidies are essentially financial assistance provided by the government to certain industries with the goal of keeping the cost of goods and services low so that consumers can afford them while also encouraging the production and use of such goods and services.

How does subsidy affect supply quizlet?

What is the impact of a subsidy on supply? In addition to lowering the cost of manufacturing, subsidies will also increase the amount of goods available.

Does a subsidy create a deadweight loss Why or why not chegg?

Yes. While producers and consumers benefit from the subsidy, the cost of the subsidy outweighs their benefit. A subsidy may be expensive, but it causes no deadweight loss because it only happens in the situation of underproduction, despite the fact that its cost is often high. An increase in equilibrium quantity as compared to the free-market amount is known as a subsidy.

Do subsidies create a wedge?

As a result of a subsidy, the price consumers pay is reduced while the price producers get is increased, resulting in the government suffering a financial burden.

How do you calculate deadweight loss from a subsidy?

Subsidies are not a bad idea as a general principle. However, it should be used to help those in need. It is only fair that the poor benefit from government subsidies for diesel, kerosene, and LPG use. People who are able to pay the market price will be rewarded. Subsidies will be provided to those who cannot afford them.

Why do subsidies shift supply curve?

When a supply-side subsidy has the effect of lowering the price at which subsidised suppliers are prepared to deliver a specific quantity of housing, the supply curve changes downward from S1 to S2, while the demand curve shifts upward from S1 to S2. The equilibrium of the housing market shifts from point A to point B, resulting in a drop in price and an increase in the amount of houses provided.

How does subsidy influence the supply of a good by a firm?

When the government grants a subsidy to a producer of products, the supply of commodities will grow as a result of the subsidy. This is achievable due to a drop in the cost of manufacturing, which results in an increase in profit.

What do subsidies and commodity taxes have in common?

What do commodities taxes and government subsidies have in common? In the half of the market with the more inelastic curve, both policies have a higher influence than on the other side. Whenever an external cost is present in a market, economic efficiency may be improved by the following measures: government involvement

Who pays for a wage subsidy?

A wage subsidy is a payment provided to workers by the government, which might be made directly to them or through their employers. Its objectives are to redistribute income and to avoid the welfare trap that has been associated with other types of assistance, hence lowering unemployment rates.

What is true regarding the economic impact of a subsidy quizlet?

Following the implementation of the subsidy, the market price of the goods will reduce. When it comes to the economic impact of a subsidy, which of the following statements is correct? … Not demand, but amount requested would be reduced as a result of the price increase.

Why does deadweight loss occur quizlet?

It is possible to have deadweight loss when supply and demand are not in equilibrium. Consumable goods for which demand tends to decline as income increases.

Why does a tax create a deadweight loss?

Supply and demand are out of balance when there is a deadweight loss. Product categories where demand tends to decrease as income increases.

Why is there a deadweight loss quizlet?

Deadweight loss refers to the advantages that consumers and/or producers lose as a result of markets that are not functioning properly.

… Having a price ceiling that is lower than the equilibrium price in a completely competitive market will lead to deadweight loss, as it will limit the amount of product that is available from manufacturers.

Y1/IB 29) Subsidy and Deadweight Welfare Loss

What is deadweight loss and how does it occur? What is the impact of a subsidy on consumer and producer surplus? What is the impact of subsidies on consumer surplus? deadweight loss subsidy graph deadweight loss example deadweight loss subsidy formula deadweight loss graph deadweight loss example a formula for calculating deadweight loss per unit of subsidy definition See more entries in the FAQ category.

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4.7 Taxes and Subsidies – Principles of Microeconomics

You will be able to do the following by the conclusion of this section:

  • Distinguish between the incidence of legal and economic taxes. Be familiar with how to depict taxes using the shifting curve and the wedge approach
  • Understand how a tax affects the quantity and price of a product
  • Give an explanation of how taxes and subsidies result in deadweight loss.

Despite the fact that taxes are not the most popular policy, they are frequently required. By changing the curve and utilizing the wedge approach, we will be able to better understand how taxes influence the market and how to mitigate their effects. First and foremost, we must distinguish between the incidence of legal taxation and the incidence of economic taxation.

Legal versus Economic Tax Incidence

When the government establishes a tax, it must choose whether the tax will be levied against producers or against consumers. This is referred to as “legal tax incidence.” Consumer-facing taxes such as the Government Sales Tax (GST) and Provincial Sales Tax (PST) are among the most well-known types of taxes (PST). In addition, the government imposes levies on manufacturers, such as the gas tax, which reduces their profit margins. When identifying who is effected by a tax, the legal incidence of the tax is essentially immaterial to the decision.

In the same way, a tax on consumers would eventually diminish the quantity required and the excess produced by producers.

Tax – Shifting the Curve

As discussed in Topic 3, we discovered that the supply curve was formed from a firm’s Marginal Cost and that variations in the supply curve were produced by any changes in the market that resulted in an increase in MC across the board. This is no different in the case of a tax. From the point of view of the producer, every tax imposed on them is just an increase in the marginal costs per unit produced. Examine the oil market once more to see how a tax would have an impact on the market. Suppose the government imposes a $3 gas tax on producers (a legitimate tax incidence on producers), the supply curve will move up by $3 as a result of the tax.

It should be noted that producers no longer earn $5; instead, they now receive only $2, as $3 must be given to the government.

Imagine that the legal incidence of the tax is placed on the customers, as seen in Figure 4.7a.

For example, if customers are only ready to pay $4/gallon for 4 million gallons of oil but are aware that they would be charged a $3/gallon tax at the pump, they will only purchase 4 million gallons of oil if the ticket price is just $1.

The $2 that was paid to the producers before taxes will be returned to them. The end consequence is the same regardless of whether the tax is charged on the consumer or on the producer, demonstrating that the legal incidence of the tax is unimportant.

Tax – The Wedge Method

Another way to look at taxes is via the lens of the wedge approach. As a result of this strategy, it is recognized that who pays the tax is ultimately immaterial. As opposed to this, the wedge approach explains how a tax creates a wedge between the price consumers pay and the revenue producers get that is proportional to the amount of tax charged. As seen in the illustration below, finding the new equilibrium is as simple as finding a $3 wedge between the two curves. Only $0.7 is tried for the first wedge, followed by $1.5, and so on until the $3.0 tax is discovered.

Market Surplus

In the same way that price and quantity restrictions must be compared before and after a price change in order to properly appreciate the impact of a tax policy on surplus, one must compare the market surplus before and after a tax policy change. Figure 4.7d (right)

Before

The market surplus prior to the tax has not been indicated, although this should be a normal part of the process. Make certain you understand how to obtain the values shown below: Consumer surplus is equal to $4 million. 8 million dollars in producer surplus Market Surplus is equal to $12 million.

After

Based on this illustration, the market surplus following implementation of policy may be computed. Consumer Surplus (in the blue area) equals $1 million dollars. Producer Surplus (in the red area) equals $2 million. Revenue from the government (in the green area) = $6 million Market Surplus is equal to $9 million.

Why is Government Included in Market Surplus

We did not include any mention of government revenue in our earlier examples dealing with market excess since the government was not participating in our market at the time of writing. Keep in mind that market excess is our yardstick for measuring efficiency. Without consideration for the government, this statistic would be of limited use. For the sake of this example, a million-dollar loss to the government would be considered efficient if it resulted in a one-dollar benefit to the general public.

  • As was the case with the quota, a reduction in quantity resulted in a drop in both consumer and producer surplus.
  • It is this time when consumers and producers are the ones who are being redistributed to the government.
  • Price adjustments merely rebalance the distribution of excess among consumers, producers, and the government.
  • Figure 4.7e (right)

Transfer – The Impact of Price

The price effect of the tax causes regions A and C to be moved from consumer and producer surplus to government income as a result of the tax’s influence on prices. Bringing Consumers to the Government – Area A Gasoline was initially priced at $4 per gallon for consumers. They are now spending $5 per gallon of gasoline. The $1 rise in price represents the part of the tax that consumers are responsible for paying out of pocket. Despite the fact that the tax is charged against producers, consumers are still required to shoulder a portion of the price increase.

This is due to the fact that a drop in the price to producers implies a decrease in the quantity provided, and in order to preserve equilibrium, the quantity required must reduce by an equivalent amount.

Because of this pricing shift, the government will collect $1 x 2 million gallons, or $2 million, in tax income from customers in the next fiscal year. Essentially, this is a direct transfer from consumers to the government, and it has no impact on the market surplus.

Producers to Government – Area C

In the beginning, gas producers earned a $4-per-gallon income share. They are now paid $2 per gallon of gasoline. This $2 reduction represents the share of the tax that manufacturers are responsible for paying. This means that the government receives $2 million in tax income from the manufacturers for every 2 million gallons of product produced. A shift of wealth has occurred from producers to the government. According to the government’s calculations, it obtains a total of $6 million in tax money, which is collected from consumers and manufacturers.

The Implications of Quantity on Deadweight Loss Deadweight loss would not exist if we just evaluated a transfer of surplus as a possible solution.

When customers pay a higher price, they want fewer items, and when producers pay less, they supply fewer items, resulting in a decline in the amount of merchandise available for sale.

Consumer Surplus Decrease – Area B

A significant number of customers will abandon oil in favor of other fuels as a result of the price hike. The reduction in quantity demand of 1.5 million gallons of oil results in a deadweight loss of $1 million in terms of oil. Producer Surpluses are declining – In addition, producers in Area Dwill reduce the amount of oil they supply by 1.5 million gallons per year because they would now only earn $2.00 per gallon for their output. Not by chance, the magnitude of the drop is the same on both occasions.

  • It is important to remember that the amount requested must equal the quantity provided in order for the market to stay stable.
  • Take note, however, that the consequence of this quantity reduction results in a greater fall in producer surplus than consumer surplus, resulting in a $2 million decline in producer surplus.
  • Together, these reductions result in a $3 million reduction in deadweight (the difference between the market surplus before and market surplus after).
  • It is a benefit provided by the government to organisations or people, and it is typically in the form of a cash payment or a tax deduction.
  • In economic terms, a subsidy acts as a wedge, lowering the price consumers pay while raising the price producers get, resulting in a net loss for the government.
  • Many regulations have been created in reaction to this, allowing low-income families to remain homeowners despite their financial circumstances.
  • Please note that the following policy is impractical, but it provides for a straightforward understanding of the effect of subsidies.
  • The government wants to significantly expand the number of customers who can afford to buy a home, so it offers a $300,000 subsidy to everyone who purchases a new home during the current fiscal year.
  • Across all of the government initiatives we’ve looked at so far, we’ve tried to figure out whether the policy has had an effect on either increasing or decreasing the market surplus.

Unfortunately, as the amount of surplus overlap on our diagram rises, the situation becomes more difficult. To make the study easier to understand, the following figure divides the changes in producers, consumers, and the government into three independent plots. Figure 4.7g (High Resolution)

Producers

Producers will now get $550,000 instead of $400,000, resulting in an increase in the quantity of food delivered to 60,000 households. Areas A and B see an increase in producer surplus as a result of this.

Consumers

Consumers now pay $250,000 instead of $400,000, resulting in an increase in the number of dwellings required to 60,000. This enhances consumer surplus in the areas covered by Cand D’s research.

Government

This idea would cost the government $18 billion and require the government to pay $300,000 per property in order to subsidize the 60,000 customers who are purchasing new homes. In terms of numbers, this corresponds to a reduction in government spending in areas A, B, C, D, and E.

Result

These are the regions where we anticipate total benefits from the policy (to producers and consumers), whereas the areas where we anticipate entire losses (the cost to the government) are areas A, B, C, D and E. To sum it all up: Specifically, the government transfers control of Areas A, B, C, and D to consumers and producers. Area E represents a deadweight loss resulting from the policy. There are two points to take note of in this particular scenario. First and foremost, the program was effective in increasing the number of residences built from 40,000 to 60,000.

It’s important to remember that if a quantity is moved from its equilibrium value, in the absence of externalities, there is a deadweight loss.

Summary

AreasA, B, C, and D represent the overall benefits of the policy (to producers and consumers), whereas areasA, B, C, D, and E represent the total losses (the cost to the government). Simply put, we may say that Specifically, the government transfers control of AreasA, B, C, and D to consumers and producers. Area E represents a deadweight loss incurred as a result of the insurance contract. When looking at this example, there are two factors to keep in mind: First and foremost, the program was effective in raising the number of residences built from 40,000 to 60,000 units each year.

Please keep in mind that if a quantity is moved from its equilibrium value, in the absence of externalities, there is a deadweight loss.

Glossary

Economic Tax Incidence is the distribution of tax depending on who bears the burden in the new equilibrium, which is determined by the elasticity of the new equilibrium market. Legal Tax Incidence refers to the legal allocation of who is responsible for paying the tax.

Subsidy is a benefit provided by the government to organisations or people, and it is typically in the form of a monetary transfer or a decrease in taxation. It is frequently done in order to relieve some form of burden, and it is frequently deemed to be in the general public’s best interests.

Exercises 4.7

For the following THREE questions, refer to the supply and demand curves depicted in the illustration below. Take, for example, the imposition of a $20 per unit tax in this industry. 1.Can you tell me which regions reflect the loss in consumer and producer surplus as a result of this taxation? If you have any questions, please contact us at [email protected] or [phone number]. If you have any questions, please contact us at [email protected] or [phone number] or [email protected] or [email protected].

If you have any questions, please contact us at [email protected] or [phone number].

3.In which areas does the deadweight loss connected with this tax manifest itself?

Given the after-tax equilibrium in the sock market, which of the following claims is FALSE if the government imposes a constant per-unit tax on socks: (Assume that the demand curve for socks is downward sloping.) a) As a result of the tax, consumers are in a worse financial position.

Because of the tax, producers are in a worse financial position.

5.Refer to the supply and demand diagram in the next section.

If a subsidy is brought into a market, which of the following statements is TRUE?

Make no assumptions about externalities.

b) The surpluses of consumers and producers fall, but the surplus of society grows.

d) The consumer surplus, the producer surplus, and the social surplus are all on the decline.

Suppose that a $6 per unit tax is imposed in this market, the price that consumers pay will be equal to , and the price that producers get net of the tax will be equal to .

This market’s new equilibrium quantity will be:a) 20 units if a $6 per unit tax is imposed on each unit sold.

c) A total of 60 units.

9) Which of the following claims regarding the deadweight loss of taxes is TRUE?

b) If there is no deadweight loss, then the income raised by the government equals exactly the amount of money lost by consumers and producers as a result of the taxation.

d) Neither a) nor b) are correct.

a) The surpluses of consumers and producers rise, while the surplus of society falls.

b) The surpluses of consumers, producers, and society as a whole all grow in size.

11.Which of the following best illustrates the equilibrium consequences of a per unit subsidy?

Price increases for consumers, but producer prices decline and supply increases.

b) The consumer price increases, the producer price increases, and the amount of goods produced increases.

12.Refer to the supply and demand diagram in the next paragraph.

a) Five dollars; ten dollars A) $6; $11.

C) $8; $3.

13.

What will be the equilibrium quantity if a $2 per unit subsidy is put in the market?

b) A total of 45 units.

d) A total of 55 units.

Assume that: I there are no externalities; and (ii) in the absence of government regulation, the market supply curve is the one labeled S1.14 (supply curve in the absence of government regulation).

Which section of the market will suffer the most from the imposition of a $5 per unit tax in this market? a) The letter a. b) a + b.c) a + b.d) a + d.e) a + d. d) the sum of a, b, and c.

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