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    Efficiency cost

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    The inverse market demand curve is P=140-Q, and the inverse supply curve is P=20+Q. Now suppose a commodity subsidy of $20 is given for each unit of production. In this new distorted market equilibrium, compute the following:

    1. equilibrium demand price
    2. equilibrium supply price
    3. equilibrium quantity
    4. the additional value of consumption, relative to the undistorted equilibrium (i.e.)
    (the equilibrium without the commodity subsidy).
    5. the additional resource cost, relative to the undistorted equilibrium (i.e) without subsidy
    6. the increased consumer surplus relative to the undistorted equilibrium (i.e) without
    subsidy.
    7. the increased producer surplus relative to the undistorted equilibrium (i.e) without
    susbidy.
    8. The subsidy payment in dollars.
    9. The efficiency cost of the subsidy relative to the undistorted equilibrium (ie) without
    subsidy.

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    https://brainmass.com/economics/general-equilibrium/commodity-subsidy-effect-consumer-producer-surplus-151147

    Solution Preview

    The inverse market demand curve is P=140-Q, and the inverse supply curve is P=20+Q. Now suppose a commodity subsidy of $20 is imposed on each unit of production in this market. In the new distorted market equilibrium, compute the following:

    1. equilibrium demand price
    Please see #3

    2. equilibrium supply price
    Please see #3

    3. equilibrium quantity
    PS - PD = Amount of subsidy
    Or 20 + Q - 140 + Q = 20
    Or 2Q = 140, which gives Q = 140/2 = 70
    At Q = 70, PD = 140 - 70 = $70
    At ...

    Solution Summary

    Efficiency cost is found. The expert examines commodity subsidy effects on consumer/producer surplus.

    $2.19