Asked by Jackie Balarezo on Jul 29, 2024
Verified
Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.
Deadweight Loss
The loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved due to market distortions.
Subsidy Payments
Financial support given by a government or organization to lower the price of a product or service or to support a business or economic sector.
Quantity Supplied
Quantity supplied refers to the total amount of a product or service that producers are willing and able to sell at a given price over a specified period.
- Familiarize oneself with the concept of deadweight loss and its sources in the context of taxation and subsidies.
Verified Answer
PR
Paola RodriguezAug 02, 2024
Final Answer :
C
Explanation :
Subsidies lead to a situation where the quantity supplied exceeds the equilibrium quantity. This results in a deadweight loss because the cost of producing the additional units (marginal cost) is higher than what consumers are willing to pay for them, leading to an inefficient allocation of resources.
Learning Objectives
- Familiarize oneself with the concept of deadweight loss and its sources in the context of taxation and subsidies.