Question

If a subsidy Is introduced in a market, then which of the following statement is TRUE?

a. Consumer surplus, producer surplus, and soclal surplus all increase.
b. Consumer and producer surplus increase but social surplus decreases:
c. Consumer surplus, producer surplus, and soclal surplus all decrease
d. Consumer and producer surplus decrease but soclal surplus increases.

Answer 1

When a subsidy is introduced in a market, consumer surplus, producer surplus, and social surplus all increase.

Step-by-step explanation:

If a subsidy is introduced in a market, the correct statement is option a. Consumer surplus, producer surplus, and social surplus all increase.

When a subsidy is introduced, it lowers the cost of production for producers, allowing them to supply a higher quantity at a lower price. This increase in supply leads to an increase in consumer surplus as consumers are able to purchase the product at a lower price. Additionally, producer surplus increases as producers are able to earn higher profits.

The increase in both consumer and producer surplus results in an overall increase in social surplus, which represents the total welfare or benefit to society.