
Figure 3.15 The Impact of a Producer Subsidy
In the presubsidy market for gasoline, the supply curve
S1 intersects with the demand curve
D at the equilibrium price
P1 and equilibrium quantity
Q1. The consumer surplus is
A +
B +
C, and the producer surplus is
F +
G +
J. After a government subsidy is put in place, the supply curve shifts down by the amount of the subsidy,
Ps –
Pb, to
S2. At the equilibrium, the quantity increases to
Q2, the price facing suppliers is
Ps, and the price facing buyers is
Pb. Consumer surplus is now
A +
B +
C +
F +
G +
H, and producer surplus is
F +
G +
J +
B +
C +
D. The cost of the subsidy is
B +
C +
D +
E +
F +
G +
H +
I, and the deadweight loss is
E +
I. Therefore, the costs associated with the subsidy are larger than the sum of the benefits to producers and consumers.