This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy.

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This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy.

Suppose that the government subsidizes a good:

For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.

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