Question

Subsidies are most likely to:

• reduce total economic surplus.

• reduce consumer surplus.

• leave total economic surplus unchanged, but transfer surplus from producers to consumers.

• increase total economic surplus.

Answer 1

reduce total economic surplus

economic surplus is the surplus of the assets and investments including profits, income, capital and goods.

When a subsidy is given it reduces the prices of the goods and services. In this situation consumers are able to buy more goods as the price is reduced due to subsidy. In this case demand will go up and the surplus can be used and adjusted with the increasing demand. This will reduce the economic surplus overall. There can be a equilibrium maintanence here.