Suppose bread is subsidized in a small Caribbean nation with a high percentage of citizens who live in poverty. The subsidy is paid to suppliers of bread by the government in the amount of 50 pesos per loaf. In the absence of the subsidy, the price of bread would be 100 pesos per loaf. Assuming that the supply of bread is perfectly elastic at the 100 peso price, show the effect of the subsidy on the market equilibrium price of bread. Assuming no externalities, show that the subsidy will result in more than the efficient amount of bread being produced. Show the excess burden of the subsidy on your graph. Explain why the subsidy will provide benefits to the nonpoor as well as the poor.
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