E in consumer surplus. Similarly, producers gain areas B and C in producer surplus. Judging based on consumers and producers alone, it seems as though subsidies are beneficial overall. However, when we consider the expense for the government to provide the subsidy, represented by area FACED, we find that there is a dead-weight loss of area F to the economy. A subsidy is not always granted to consumers. For example, the government may feel that steel is an important commodity and subsidize steel producers to stimulate production.
The subsidy to the producer is viewed as a decrease in production costs, which allows producers to expand production from SO to AS. In figure 4. F. 3, the vertical distance between the original supply curve and the subsidized supply curve again represents the subsidy provided by the government. In this case, the subsidy is $4, calculated as $10 – $6. The result of the subsidy is increased production, from an equilibrium quantity of 10 to 13, which is matched by increased consumption by consumers. Consumers now pay $6 instead of the equilibrium $9, and producers receive $10 instead of $9.
This graph also illustrates another point that relates besides to the elasticity of the
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