Reference no: EM13796816

Consider an agricultural subsidy provided by the US government. Consider also that milk is one of the products subsidized. If there is NO trade with the rest of the world, the domestic price of milk in the US would be $2 per gallon and the equilibrium quantity would be 100 gallons at this price. After trade opens, at the world market price of $1 per gallon, domestic firms supply only 50 gallons and consumers consume 130 gallons of milk. Hence, the country imports 80 gallons of milk at the world price. Now the government decides to subsidize the producers of milk. The government gives $2 for each gallon that the producers export. At this new price, the domestic consumers buy only 50 gallons but the producers can produce 130 gallons. Label each area you may use in your answers.

a) Draw the demand and supply curves for milk in the US. Indicate both price and quantities before and after subsidy

b) Show the area that represents the gain to the producers after the subsidy

c) Show the area that represents the costs to the government due to the subsidy

d) Show the area that represents the change in consumer surplus after the subsidy

 

e) Show and calculate the area that represents the dead weight loss due to the subsidy