P Q D S S + q Q0Q0 Q1Q1 P0P0 P1P1 Boardman et al. Figure 4.3 ∆CS ∆PS ∆GS

Problem with this diagram Shift in supply curve: –S + q Government cannot costlessly shift supply curve. Either: –Produces directly (movement along existing supply curve –Lowers cost curve for all producers (investment in infrastructure) –Subsidizes production (subsidy lowers net cost of production, but actual resource costs are unchanged)

P Q D S Q0Q0 Q1Q1 P0P0 P1P1 Q1pQ1p Government prod’n cost Government revenues ∆Net gov’t surplus (-) ∆ CS ∆PS Government Produces directly NB = ∆ CS + ∆PS + ∆Net gov’t surplus

P D S Q0Q0 P0P0 S1S1 Q1Q1 P1P1 ∆CS ∆PS Gov’t lowers cost for all producers NB = Initial Investment + ∑ i (∆PS i + ∆CS i )

P D S Q0Q0 P0P0 S1S1 Q1Q1 P1P1 ∆CS ∆PS Gov’t pays subsidy to producers P 1 +S Subsidy ∆Net gov’t surplus (-) NB = ∆ CS + ∆PS + ∆Net gov’t surplus