Question

Create your own diagram of any one of the four market interventions listed below.

• Tax
• Subsidy
• Price Ceiling
• Price Floor

Here's what I want your graph to show:

1. Original market equilibrium
2. The size of the tax or subsidy OR the level of the controlled price (depending on which intervention you choose)
3. The final market quantity
4. The area of deadweight loss (lost gains from trade) that results from this market intervention (shade it in and label it)
5. All other appropriate labels (D, S, P, Q, etc.)

Answer 1

I am taking the case of subsidy given by the government.

1) Original equilibrium occurs when demand = supply. At this point, price is P* and output is Y*.

2) Size of subsidy is (Ps - Pb).

3) Final market quantity rises from Y* till the point where dashed line touch X-axis.

4) Area of deadweight loss from subsidy is area of portion H.

Additional information you might want:

Before Subsidy:

• Consumer surplus is area of portion A + B.
• Producer surplus is area of portion C + D.

After subsidy:

• Consumer surplus is area of portion A + B + C + E + G
• Producer surplus is area of portion D + C + B + F
• Government revenue is -(B + C + F + E + G + H)
• Deadweight loss is area of portion H.