Answer to Question #307492 in Microeconomics for Roo

Question

"subsidies are inefficient since they lead to a deadweight loss. do you agree? use diagrams to illustrate your answer

Answer 1

No, we do not agree, since internal subsidies, for example, support domestic producers, and they pay taxes accordingly. Producers will pay more taxes and the subsidies will pay off

In a small country, the domestic supply of a good is Sd and the demand is Dd. The offer from abroad is unlimited and amounts to Sw at the price of Pw. At the same time, domestic production will be Q1, consumption - Q3, import - Q3Q1.

With the introduction of a domestic subsidy, the price of the subsidized product is reduced by the amount of the subsidy and the direct domestic supply is shifted by

Ss level. Domestic production rises to Q2, imports decline to Q3Q2. at production volume Q2, the producer receives a price Ps for his product, which is made up of the price paid by the consumer Pw and the subsidy PwP.

Government spending is PwPs*Q2.

As a result of the introduction of subsidies, the following economic effects arise. Part of the subsidy goes to the more efficient national producers of the given product in the form of a producer – segment a. The protection effect b arises from the fact that inefficient producers get the opportunity to sell their product. As already noted, when a domestic subsidy is introduced, there is no increase in prices for consumers, and therefore there is no consumption effect, which makes a domestic subsidy a preferable instrument of trade policy compared to

quota or tariff. However, the internal subsidy is financed from the budget, i.e. through taxes