Answer to Question #179434 in Microeconomics for Azka Bhatti

Question

A subsidy is the opposite of tax/ With a $0.5 tax on the buyers of ice creams, the government collects $0.5 for each ice-cream purchased; with a $0.5 subsidy for the buyers of ice-cream, the government pays buyer $0.5 for each ice-cream purchases.

Show the effect of a $0.5 subsidy per ice-cream on the demand curve of ice-creams, the effective price paid by consumers, the effective price received by sellers and the quantity of ice-creams sold.

Do consumers gain or lose from this policy? Do producers gain or lose from this policy? Does the government gain or lose?

Answer 1

1) effect on the demand curve.

The demand curve shifts to the right because it´s more favourable to buy an ice cream. Effective price paid by consumers $P_e$; Effective price recieved by sellers $P_m;$ Quantity purchased $Q_{d_1}$;

2) both consumers and producers are gaining from this polic. The government loses because it has to pay out the subsidy to the consumers instead of collecting the tax