This chapter analyzed the welfare effects of a tax on a good. Now consider the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus?

With the subsidy offered by the government, the consumer surplus will increase because they will demand more, the tax revenue will reduce and not increase, the producer surplus will not be affected much because the price that the producers receive will remain the same.

Explanation:

A subsidy or government incentive is a type of budgetary guide or bolster reached out to a monetary segment by and large with the point of advancing financial and social arrangement. Albeit usually stretched out from government, the term appropriation can identify with a help – for instance from NGOs or as certain endowments.

A subsidy is a payment made to people, organizations, different governments, and other residential foundations and associations. The motivation behind government sponsorship is to guarantee the accessibility of fundamental merchandise and enterprises.

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