Consumer and producer surplus in the lack of subsidy

Question

In perfectly competitive market, the market demand and market supply curves are provided by Q^d = 1000 −10P^d and Q^d = 30P^s. Assume that the government gives a subsidy of $20 per unit to each and every seller in the market.

a) Determine equilibrium quantity demanded and supplied; also find the equilibrium market price remunerated by buyers; also get the equilibrium after-subsidy price obtained by firms.

b) Determine the consumer and producer surplus in the lack of subsidy. What is the total economic gain in the lack of a subsidy?

c) Determine the consumer and producer surplus in the existence of subsidy. Determine the impact of the subsidy on the govt. budget? Determine the net economic benefit beneath the subsidy program?

d) Does the subsidy answer in a deadweight loss? When so, how much is it?

Answer 1

In this condition, the after-subsidy price received by sellers is P^s = P^d + 20. The market-clearing situation is: 1000 – 10P = 30(P + 20), here P signifies the market price. This entails P = 10 and Q = 900. As sellers obtain the subsidy, P = P^d = 10 and P^s = P^d + 20 = 30. The excess implications of the subsidy are illustrated below: