Showing posts with label subsidies. Show all posts

Saturday, July 7, 2018

2018 AP Microeconomics FRQ #2

2018 AP Microeconomics FRQ #2

Watch me answer it here

https://youtu.be/AzdgaEt_qh8

(a) Identify the type of market failure illustrated by the graph. Explain.

The type of market failure is an Positive Consumption "Externality".

(b) Using the numbers on the graph, identify the market equilibrium price and quantity.

Part (b) is the equilibrium price of $6 and quantity of 16, the DWL at that quantity is EDF.

(d) Suppose the government is granting a subsidy to correct the market failure. What is the dollar value of the per unit subsidy to achieve the SOQ (Socially Optimal Quantity)?

(e) Suppose the government installs a price floor at $8,

(i) How many units will producers and consumers exchange? (8)

(ii) Does the Price floor correct the market failure?

NO, it actually makes it worse,, society would like 24 units consumed but after the price floor only 8 units are consumed.

College Board
Thou canst not vex me with inconsistent mind,
Since that my life on thy revolt doth lie.
O, what a happy externality do I find,
Happy to have thy love, happy to die!

Saturday, September 30, 2017

Price Floors & Price Ceilings, Indirect Tax, Subsidy Cheat Sheet (Updated)

Price Floors & Price Ceilings,

Indirect Tax, Subsidy

Cheat Sheet (Updated)

Monday, September 15, 2014

Government Intervention 2 - Subsidies

Government Intervention 2

Conversations welcome - Econowaugh's facebook

Subsidies

Subsidies - Pajholden

Subsidies - are grants provided by the government (taxpayers) to firms aiming at lowering production costs and increasing output.

Reasons that governments (taxpayers) give subsidies:

to promote exports by lowering the price of goods so they are more competitive in foreign markets.
to encourage socially beneficial activities. ex. community centers
to encourage consumption of merit goods. ex. libraries, museums

Impact of Subsidies:

Imposition of a subsidy will decrease the market price level and increase the quantity transacted of goods and services. This is graphed by a supply curve shifting to the right.

Effects on Stakeholders:

Consumers - are better off because they can pay a lower price to purchase goods and services. The vertical distance between the old supply curve and the subsidized supply curve is the value of the subsidy.
Producers - revenue increases and producers are better off.
Society - a welfare loss of (section A) is incurred. Resources are misallocated as there is potential gain that is not being captured.

There are no Multiple choice questions or FRQ's from the last 10 years having to do with subsidies. That is a good reason to study them.