Question

• Complete a welfare analysis for 1) a subsidy given to producers and 2) an import quota. You must show all of the following: • Change in consumer and producer surplus • Change in government revenue/expenditure • Change in total surplus identifying any deadweight loss • Change in consumer and producer prices and quantities.

Answer 1

Effect of Subsidy:

	Before Tariff	After Tariff
Consumer Surplus	A+B	A+B+C+F+G
Producer Surplus	C+D	B+C+D+E
Government Revenue	0	negative of (B+C+E+F+G+H)
Total Surplus	A+B+C+D	A+B+C+D+H
Consumer prices	P*	Pc
Producer prices	P*	Pp
Consumer quantity	Q*	Qn*
Producer quantity	Q*	Qn*

AS at dut duentity

Effect of Import tariff:

	total effect After import quota
Consumer Surplus	negative of (A+B+C+D)
Producer Surplus	Positive of A
Government Revenue	Positive of C
Deadweight loss	negative of (B+D)
Consumer prices	Pq
Producer prices	PI
Consumer quantity	DQ
Producer quantity	SQ

SL SQ P. Dy