Per-unit Subsidy DSP(4) – Market Intervention

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 The price is $6 and the quantity is 40 units. The price is $6 and the quantity is 40 units.

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 Per-unit subsidy = $3 The entire supply curve will shift down by $3 per unit.

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 Per-unit subsidy = $3 The entire supply curve will shift down by $3 per unit. S2S2S2S2 $3 per-unit subsidy

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P will decrease to $4 and Q will increase to 50 units. P will decrease to $4 and Q will increase to 50 units. P2P2 Q2Q2

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P2P2 Q2Q2 Where is the total expenditure of consumers after subsidy? Consumers’ total expenditure after subsidy

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P2P2 Q2Q2 Where is the total subsidy granted by the government? Subsidy granted by the government

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P2P2 Q2Q2 Where is the total revenue of sellers includingsubsidy? Where is the total revenue of sellers including subsidy? Sellers’ total revenue includingsubsidy including subsidy

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P2P2 Q2Q2 Where is the price includingsubsidy? Where is the price including subsidy? Sellers’ total revenue includingsubsidy including subsidy New price paid by consumers $3 per-unit subsidy Price including subsidy

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P2P2 Q2Q2 How does the government’s subsidy shared by the sellers and the consumers? Consumers pay less than before Subsidy granted by the government Consumers’ subsidy benefit Sellers receive more than before Sellers’ subsidy benefit

Subsidy grant Tax revenue Common mistakes Sellers Consumers per-unittax S2S2S2S2 S1S1S1S1 P1P1 Q1Q1 P2P2 Q2Q2 D Consumers Sellers per-unitsubsidy S1S1S1S1 S2S2S2S2 P2P2 Q2Q2 P1P1 Q1Q1PQ0PQ0 D Tax burden Subsidy benefit

P ($) Qty demanded Qty supplied Case 1: Per-unit subsidy is $3 Case 1: Ans (a) $390 (b) $130 (c) $260 Ans (a) $390 (b) $130 (c) $260 Please calculate (a) the subsidy granted by the gov’t; (b) the consumers’ subsidy benefit; and (c) the sellers’ subsidy benefit. Please calculate (a) the subsidy granted by the gov’t; (b) the consumers’ subsidy benefit; and (c) the sellers’ subsidy benefit.

P ($) Qty demanded Qty supplied Case 2: Per-unit subsidy is $6 Case 2: Ans (a) $480 (b) $320 (c) $160 Ans (a) $480 (b) $320 (c) $160 Please calculate (a) the subsidy granted by the gov’t; (b) the consumers’ subsidy benefit; and (c) the sellers’ subsidy benefit. Please calculate (a) the subsidy granted by the gov’t; (b) the consumers’ subsidy benefit; and (c) the sellers’ subsidy benefit.

Price ($) Q D S1S1S1S1 P1P1 Q1Q1 S2S2S2S2 $3 per-unit subsidy P2P2 Q2Q2 Consumers’ subsidy benefit Sellers’ subsidy benefit In this example, the consumers’ subsidy benefit is larger than the sellers’ subsidy benefit.

It is because the elasticity of demand is than the elasticity of supply. than the elasticity of supply. In this example, the consumers’ subsidy benefit is larger than the sellers’ subsidy benefit. smaller