ECON 1010 Chapter Notes - Chapter 3: Deadweight Loss, Marginal Cost, Economic Surplus

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ECON 1010 Full Course Notes
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ECON 1010 Full Course Notes
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If government needs to impose a tax on economy, the most effective way is to apply it to the market in panel b (less responsive and generate lower deadweight loss) . A subsidy is opposite of a tax. From previous example: assume a per-unit subsidy is applied to the sellers. This means the government pays the sellers for each unit sold in the market. The marginal cost effectively decreases by . The supply curve shits to the right, and the market experiences a reduction in price and an increase in the quantity exchanged. Unlike a tax, a subsidy is a cost for the government (not a revenue). Total cost of the subsidy is: cost of subsidy x goods. Total surplus decreases; subsidy creates a deadweight loss. Governments claim that subsidies are used to make certain goods more affordable for certain groups of poor consumers this policy brings about considerable deadweight loss and is not necessarily optimal.

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