Intermediate Microeconomics · free preview
Subsidies, Efficiency, and the Price System
A subsidy is a negative tax whose wedge arithmetic mirrors the tax case, a 4-dollar subsidy here costing 256 to destroy a triangle of 8, and the equilibrium it distorts is Pareto efficient under quasilinear preferences, the benchmark that gives deadweight loss its meaning.
1. The subsidy wedge
The subsidy wedge
2. Pareto efficiency defined
Pareto efficiency defined
3. Efficiency gives DWL its meaning
Efficiency gives DWL its meaning
4. Markets and their substitutes
Markets and their substitutes
5. Solving the subsidy
A 4-dollar per-unit subsidy to sellers in the worked market. What results?
6. The subsidy's waste
Why is the deadweight loss of this subsidy 8?
7. Defining Pareto efficiency
What exactly does Pareto efficiency require of an allocation?
8. The proof's key step
In the quasilinear proof that the competitive equilibrium is efficient, what does the equilibrium price equalize?
9. The subsidy's cost
Compute the total government cost of the 4-dollar subsidy at quantity 64, and write the number.
10. Induced trades
How many additional units does the subsidy induce relative to the free equilibrium of 60? Write the number.
11. Prices under the subsidy
In the worked market, the 4-dollar subsidy to sellers produces which pair of prices?
12. The traders' gain versus the bill
The subsidy costs the government 256 while the deadweight loss is 8. What do buyers and sellers together gain?
13. The marginal unit's arithmetic
At the subsidized quantity of 64, the demand curve prices the marginal unit at 18 and the supply curve at 22. What does the gap say?
14. Cost per unit of expansion
The subsidy spends 256 to raise quantity by 4 units. What is the cost per additional unit?
15. The seller's receipt
Under the 4-dollar subsidy, compute the price sellers receive per unit, and write the number.
16. Cost per induced unit
The subsidy costs 256 in total and induces 4 additional units. Compute the cost per additional unit, and write the number.
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