(This question refers to material in the appendix to this chapter.) A market is characterised by a typical downward-sloping demand curve and an upward-sloping supply curve.

a Draw the competitive market equilibrium. Label the price, quantity, consumer surplus and producer surplus. Is there any deadweight loss? Explain.

b Suppose that the government pays a subsidy to sellers for each unit of the good that is sold.

Illustrate the effect of this subsidy on the market, being sure to label the consumer surplus, producer surplus, cost to government and deadweight loss. How does each area compare with the pre-subsidy case?

c How is the size of the deadweight loss from the subsidy related to the elasticities of demand and supply? Illustrate your answers with diagrams.