Consider a market initially in equilibrium with price P* and quantity Q*. The government puts a subsidy on consumption of s dollars for each unit of the good consumed. Show on a supply and demand graph, and clearly state, how this affects the equilibrium quantity in the market, the equilibrium price paid by consumers, and the equilibrium price received by producers. Also, clearly tabulate ΔCS, ΔPS, GR, and ΔSS using appropriately labeled points on the graph. What area represents the DWL of the subsidy? Label it on the graph.

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Impact of a Consumption Subsidy on Market Equilibrium Heres an analysis of the effects of a consumption subsidy on the market equilibrium with accompa... View the full answer