a.) Widgets are produced by a competitive constant-cost industry. Suppose the government decides to pay an annual subsidy of $8,000 per year to every firm that produces widgets. (a). Explain why, in the long run, each firm's producer surplus must fall by $8,000.
(b). Suppose the subsidy causes the price of widgets to fall by $1. With the subsidy in place, does each firm produce more than, fewer than, or exactly 8,000 widgets a year?
(c). Suppose the government replaces the per-firm subsidy with a per-widget subsidy of $1. In the long run, is this change good or bad for consumers? Is it good or bad for producers? (Hint: Remember the zero-profit condition!) Is it good or bad for tax payers? Is it good or bad according to the efficiency criterion?