Subsidies Flashcards
subsidy
payment made by government to producers to pay part of the cost of production and increase output of good
Why might subsidies be implemented?
lower market price to encourage consumption - positive externality associated with good offset cost of production to expand output - diversify economy and create employment better compete with foreign competitors
deadweight welfare loss
D
total subsidy
B + C + D + E + F + G
consumer portion of subsidy
E + F + G
producer portion of subsidy
B + C
more elastic PED — the relative benefit to producers and — benefit to consumers, ceteris paribus
greater less
less elastic the PED the — the relative benefit to producers and — benefit to consumers, ceteris paribus
less greater
the more elastic the PED the — the deadweight welfare loss
greater
the more elastic the PES the — relative benefit to consumers and — benefit to producers, ceteris paribus
greater less
the less elastic the PES the — the relative benefit to producers and — the benefit to consumers, ceteris paribus
greater less
the more elastic the PES the — the deadweight welfare loss
greater
PED = undefined (perfectly elastic)
producers have entire benefit of subsidy
PED = 0 (perfectly inelastic)
consumers have entire benefit of the subsidy
PES = undefined (perfectly elastic)
consumers have entire benefit of subsidy
