Question

In: Economics

Consider the market for cars assuming that the demand curve is perfectly elastic. The government decides...

Consider the market for cars assuming that the demand curve is perfectly elastic. The government decides to give a subsidy to car producers.

Show the distributional effects of the policy in terms of changes in surplus and the deadweight loss (if any) that the policy would generate.

Solutions

Expert Solution

Since the demand curve is perfectly elastic, this should be parallel to horizontal axis.

As there is subsidy, the supply of car would increase. This shifts the supply curve to the right, which remains the price same but quantity increases.

Rahul Sunny answered 2 years ago
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