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

2. 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)

3. 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

4. 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 )

5. 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