Question

What is producer surplus? How do subsidies affect producer surplus (assuming no change in price)?

Answer 1

Producer surplus is the difference between the actual price producers receive and the minimun accepted price.Producer surplus is a measure of producer welfare. It is shown graphically as the area above the supply curve and below the equilibrium price.

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A producer always tries to increase his producer surplus by trying to sell more and more at higher prices. However, it is simply not possible to increase the producer surplus indefinitely since at higher prices there might be very little or no demand for goods.

A subsidy is any form of government support - financial or otherwise-offered to producers and (occasionally) consumers.

Subsidy- producer benefit:

- Government financial support for producer will generate extra profit and therefore improve the incentive to supply for producer.

-The producer gets the market price( P2) plus the subsidy.

-Therefore they get a higher level of producer surplus and increased revenue.(P3 * outputQ2)

-The producer benefit is the producer surplus earned before the subsidy compared with the producer surplus achieved after the subsidy.