Widgets are produced by a constant-cost industry. Suppose the government decides to institute an annual subsidy of $8,000 per year to every firm that produces widgets.
a. Explain why, in the long run, each firm's producer surplus must fall by $8,000.
b. Suppose the subsidy causes the price of widgets to fall by $1. With the subsidy in place, does each firm produce more than, fewer than, or exactly 8,000 widgets a year?
c. Suppose the government replaces the per-firm subsidy with a per-widget subsidy of $1 per widget produced. In the long run, is this change good or bad for consumers? Is it good or bad for producers? Is it good or bad for taxpayers? Is it good or bad according to the efficiency criterion?