BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

Solutions

Chapter
Section
BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

This chapter analyzed the welfare effects of a tax on a good. Now consider the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.

To determine
The impact of subsidy on the commodity.

Explanation

The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on the public expenditure of the government. The main types of taxes include the income tax, wealth tax and the professional tax. When there is a tax, it will lead to fall in the consumer surplus as well as in the producer surplus. As a result, the total surplus which is the summation of the consumer surplus and the producer surplus will fall and this fall will occur in the total surplus due to taxation which is known as the deadweight loss due to tax.

The equilibrium price is determined by the demand for the coat and the supply of coat normally. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. The producer surplus is the difference between the minimum willing to accept price by the seller and the actual price that the seller receives for the commodity.

When there is no subsidy in the economy, the economy will be in its equilibrium which will be determined at the intersection of the demand curve and the supply curve in the economy. Thus, the equilibrium price will be P1 and the equilibrium quantity will be Q1. When the subsidy is introduced in the economy, consumer pays less than the equilibrium price and the producer receives more than the equilibrium price because they receive the subsidy of $2 for every commodity sold...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

In what ways is economics a science?

Principles of Economics (MindTap Course List)

What can be done to defeat a DDoS attack?

Accounting Information Systems

RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Describe the Taguchi quality loss function, and relate it to robust quality.

Cornerstones of Cost Management (Cornerstones Series)