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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, PsPb, 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.