In a perfectly competitive market, the market demand curve is Qd = 10 − Pd, and the market supply curve is Qs = 1.5Ps.
a) Verify that the market equilibrium price and quantity in the absence of government intervention are Pd = Ps = 4 and Qd = Qs = 6.
b) Consider two possible government interventions: (1) A price ceiling of $1 per unit; (2) a subsidy of $5 per unit paid to producers. Verify that the equilibrium market price paid by consumers under the subsidy equals $1, the same as the price ceiling. Are the quantities supplied and demanded the same under each government intervention?
c) How will consumer surplus differ in these different government interventions?
d) For which form of intervention will we expect the product to be purchased by consumers with the highest willingness to pay?
e) Which government intervention results in the lower deadweight loss and why?