Effects of the Subsidy Essay Example | Topics and Well Written Essays - 1250 words

Effects of the Subsidy - Essay ExampleA market without a subsidy pull up stakes reach chemical equilibrium at the point where the demand curve intersects the pre-tax supply curve. Lets assume that the price is P and the quantity is Q.The subsidy by the government depart shift the supply curve downwards by the subsidy amount. The price paid by the buyers for the homes will fall from P to Ps, that is from $167,000 to $ 159,000 while the one to the suppliers will increase to Ps that is from $167,000 to $174,000. The quantity supplied will then increase from Q to Qs.In the graph below, the cost of the subsidy to the government is shown. The graph clearly shows a contradict balance which is the cost of the subsidy which is always greater than the benefits enjoyed by the manufacturers and the consumers.The deadweight loss of the subsidy is the amount by which the subsidy costs exceed the gains in the producer and consumer surpluses. The deadweight loss magnitude depends on the subsidy amount as well as the change in the production which results from the subsidyThe benefits obtained from the subsidy are normally shared by the producers and the consumers in a proportion which depends on the relative slopes of supply and demand functions. However, the buyers gain more than the suppliers as the subsidy lowers prices to buyers and increases the price to the sellers. assume the two firms compete on prices la Bertrand with the production function and factor prices remaining the same qM = L0.6K0.4 qK = L0.5 K0.5 the wage rate is $5 and the rental rate of bully is $10.