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True / False / Explain: Government subsidies increase economic efficiency since producer surplus and consumer surplus...

True / False / Explain: Government subsidies increase economic efficiency since producer surplus and consumer surplus increase.

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Answer #1

The given statement is false. This is because subsidies cost more than they deliver in benefits. Subsidies might increase the producer surplus and consumer surplus. However, the overall benefit to the society is not significant when we consider the cost to the government.

In the diagram, we can clearly see that a dead weight loss is created and the costs to the government wipes out the entire increase in comsumer and producer surplus due to subsidy.

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