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Government Policies and Market Efficiency
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A government decides to implement a subsidy for electric vehicles to encourage their adoption. As a result, the price consumers pay decreases, while the price producers receive increases. Considering the concepts of allocative efficiency and deadweight loss, what is the most likely outcome of this intervention on market efficiency?

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Choose the Best Answer

A

The market becomes more efficient as consumer surplus increases without harming producer surplus.

B

The overall market efficiency decreases due to the deadweight loss created by the subsidy.

C

Both consumer and producer surplus will increase, leading to improved market efficiency.

D

The subsidy will have no impact on market efficiency since it only affects prices.

Understanding the Answer

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Answer

When a government provides a subsidy for electric vehicles, it lowers the price for consumers, making these vehicles more affordable. This encourages more people to buy electric cars, which can lead to a higher overall demand. At the same time, producers receive more money for each car sold, which can motivate them to produce more. This situation can improve allocative efficiency because resources are directed toward the production of electric vehicles that are now more in demand. However, if the subsidy leads to overly high production beyond what is necessary, it could create deadweight loss, meaning that some resources are wasted and overall market efficiency could decrease.

Detailed Explanation

When the government gives a subsidy, it can create deadweight loss. Other options are incorrect because This answer suggests that both consumer and producer benefits grow without any cost; While it seems both groups gain, the subsidy can distort the market.

Key Concepts

Government interventions
Market efficiency
Allocative efficiency
Topic

Government Policies and Market Efficiency

Difficulty

medium level question

Cognitive Level

understand

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