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Economic surplus

Consumers are seemingly better off, being able to purchase additional units for less, while producers sell more and receive a higher price in return. Cost-benefit analysis can be used to evaluate the efficiency of a subsidy. Before Subsidy After Subsidy Change Consumer Surplus ABED Producer Surplus GIBED Government Spending HttpeconomicsaboutcomodregulationssAnaly subsidiaries htmstepheadinghttpswwwgo cyclometers By Evelyn Net Change Table 4. F. 1 From the cost-benefit analysis in table 4. F. 1, we see that consumers gain areas D and

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

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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 supply or demand curve. In this particular example, the supply curve is much more elastic than previous examples. Due to the flatness of the curve, the supplier receives less of the subsidy, represented by region A, than consumers, represented by area B. The amount of producer surplus can be calculated by using the area formula of a trapezoid, which is the average of its bases times the height. The area enclosed by region A represents $1 1. 50 [Calculated as ]. The consumer surplus, region B, on the other hand, represents $34. 0 [Calculated as ]. The entire cost of the subsidy is the sum of area BBC, or $52 [Calculated as ], which means that the remaining dead-weight loss, area C, must equal $6 [Calculated as ]. It becomes apparent that the flatter the curve of the supplier, the less of the subsidy they receive. The opposite is also true of demander – the flatter their demand curve, the less subsidy they would receive. If a curve was perfectly elastic, then any subsidy would go entirely to the other party (I. E. , if the supply curve was perfectly elastic, or flat, then the entire amount of the subsidy will fall solely into the

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