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Excess burden of the subsidy

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Suppose bread is subsidized in a small Caribbean nation with a high percentage of citizens who live in poverty. The subsidy is paid to suppliers of bread by the government in the amount of 50 pesos per loaf. In the absence of the subsidy, the price of bread would be 100 pesos per loaf. Assuming that the supply of bread is perfectly elastic at the 100 peso price, what is the effect of the subsidy on the market equilibrium price of bread? Draw a graph, and explain the excess burden of the subsidy. Assuming no externalities, why will subsidy result in more than the efficient amount of bread being produced? Create a graph on a spreadsheet program

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There is no effect of the subsidy on market equilibrium price of bread. The supply is perfectly elastic at 100 pesos and the price of bread will remain 100 pesos. The effect of the subsidy is that the demand curve has shifted to the right. ...

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Discussion Questions on Supply and Demand

1) Government intervenes in the free market by many different ways. For example, regulators may use price controls, impose taxes on consumers as well as on producers and give subsidies to producers. What would be the intended outcome in the market by each of the above government actions? Give a real-world example of how government intervention in the free market affects the demand for or supply of a product or service you use or a product or service produced at your workplace.

2) Under antitrust policies, the government breaks-up some dominant firms, prevents corporate mergers, and regulates some business practices that reduce competition. What are the major antitrust laws in the United States? Discusses several major antitrust cases in the United States. Discuss how the US economy will likely differ today if AT&T had not been broken-up. How do these laws affect (or affected) your work place or products used at your work place?

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