1. Incidence of Subsidies

Incidence is not only relevant when thinking about taxation; the same issues apply when we think about subsidies.

a)Let's consider the case of Gabriel. Gabriel is enrolling in extension school and is deciding how many courses he wants to take. The cost per course is $4,000. The government decides to provide a subsidy (grant) of $1,000 per course to Gabriel. The graph below shows the supply and demand for extension school classes before the program. Show on the graph how the supply and/or demand curves will shift after the program and what the deadweight loss of the program will be. Also explain intuitively why the deadweight loss arises.

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