Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 2] DEMAND, SUPPLY, AND EQUILIBRIUM: AN OVERVIEW 37
(a)
(b)
If P x is not allowed to fall below $4, a surplus of 40,000 units of X will result per time period.
If P x is not allowed to rise above $2, a shortage of 40,000 units of X would result per time period. Ceteris
paribus, this surplus or shortage would persist indefinitely and at the same level, time period after time period.
2.26 What happens if the government (a) grants a per-unit cash subsidy to all producers of a commodity or
(b) collects instead a per-unit sales tax from all the producers of the commodity? (c) How is the
imposition of a price floor or price ceiling different from the granting of a per-unit cash subsidy or
the collecting of a per-unit sales tax from all the producers of a commodity?
(a)
(b)
(c)
If the government grants a per-unit cash subsidy to all the producers of a commodity, the supply curve of each
producer will shift downward by a vertical distance equal to the amount of the cash subsidy per unit. This is
like a reduction in the costs of production; it has the same effect on the producers’ supply curves and the
market supply curve as an improvement in technology.
The exact opposite to the result in part (a) occurs if instead the government collects a per-unit sales tax from
each of the individual producers of commodity X.
The imposition of a price floor or a price ceiling represents an interference with the operation of the market
mechanism and as a result, the equilibrium point of the commodity may not be reached.
On the other hand, when the government grants a per-unit cash subsidy or collects a per-unit sales tax from all
producers of the commodity, the equilibrium point will change but it will still be determined by the intersection
of the market demand curve and the market supply curve of the commodity. The government is then said to be
working through the market rather than interfering with its operation. In subsequent chapters, we will see that,
in general, it is more efficient to work through the market mechanism than to interfere with its operation. (Additional
qualifications to our concept of equilibrium were discussed in Chapter 1 under the headings of Comparative Statics
and Partial Equilibrium.)
2.27 Suppose that from the condition of equilibrium in Problem 2.17, the government decides to grant a
subsidy of $1 on each unit of commodity X produced to each of the 1000 identical producers of
commodity X. (a) What effect does this have on the equilibrium price and quantity of commodity
X? (b) Do consumers of commodity X reap any benefit from this?
(a)
(b)
The subsidy causes each producer’s supply curve and the market supply curve for X to shift down by a vertical
distance equal to $1. The new market supply curve is indicated by S 0 x and the new equilibrium point by E0 in
Fig. 2-27. The new equilibrium price for commodity X is $2.50 and the new equilibrium quantity is 70,000
units.
Even though the subsidy was paid to producers of commodity X, consumers of this commodity also share in
the benefit. Consumers now pay only $2.50 for each unit of X purchased rather than the $3 they paid before the
subsidy was granted, and they now consume 70,000 rather than 60,000 units.
Fig. 2-27 Fig. 2-28