Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers U.S. producers a $2,000 subsidy for every car they produce (regardless of whether the car is sold in the United States or abroad).
a. What prices must Americans pay for cars before and after the subsidy is offered? What prices do U.S. producers feel they are receiving before and after the subsidy is offered?
b. Before and after the subsidy is offered, calculate the gains to all relevant groups of Americans. What is the deadweight loss due to the subsidy?