Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases consumer surplus by reducing prices without causing deadweight loss.
B
It leads to overproduction and potential deadweight loss due to misallocation of resources.
C
It has no effect on producer surplus or market efficiency.
D
It ensures every consumer can buy the product at a lower price without any drawbacks.
Understanding the Answer
Let's break down why this is correct
Answer
When a government introduces a subsidy in a competitive market, it lowers the cost for producers, encouraging them to produce more goods. This increase in production can lead to lower prices for consumers, making products more affordable. As a result, the quantity of goods supplied may increase, moving the market closer to an optimal outcome where supply meets demand efficiently. For example, if the government gives farmers a subsidy to grow corn, they may plant more corn, resulting in lower corn prices and making it easier for consumers to buy it. However, if the subsidy leads to overproduction or waste, it could result in a sub-optimal outcome, where resources are not used effectively.
Detailed Explanation
A subsidy can make producers create more than what is needed. Other options are incorrect because This answer suggests that subsidies only help consumers without any downsides; This option claims subsidies do nothing to market efficiency.
Key Concepts
Optimal and sub-optimal outcomes
Allocative efficiency
Deadweight loss
Topic
Optimal and Sub-optimal Outcomes
Difficulty
easy level question
Cognitive Level
understand
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