ECON 200 Lecture Notes - Lecture 24: Demand Curve, Economic Surplus
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ECON 200 Full Course Notes
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Econ 200 i lecture 24 subsidies. Governments give subsidies on goods and services to help those in need. Can be given to buyers or sellers. Subsidy incidence: how the benefit of a subsidy is shared among market. In this case, we will just be analyzing per-unit subsidy (for simplicity) participants. Subsidy lowers sellers" cost by the amount of subsidy. Sellers choose q where p = mc subsidy. Sellers get ps = p2 + subsidy. Buyers choose q where p = mv + subsidy. Buyers pay pb = p2 subsidy. Subsidy equivalent: whether the government gives a subsidy to buyers or sellers, all effects are the same. If demand is more inelastic than supply, the buyers" subsidy benefit > sellers" subsidy benefit. If supply is more inelastic than demand, the sellers" subsidy benefit > buyers" subsidy benefit. A subsidy benefit falls more heavily on the relatively inelastic party.
