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 agoRelated Solutions
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