1. Per Unit Subsidy VS Lump-Sum Subsidy Suppose The Government Wants To Introduce Some Subsidy On Good X. It Has Two Op- Tions: Per Unit Subsidy Or Lump-Sum Subsidy. Suppose Consumers Take All The Subsidy Benefit, So We Don't Need To Worry About The Subsidy Division Between The Consumers And Producers. (A) Suppose The Government Spends The Same Amount Of

1. Per Unit subsidy VS Lump-sum subsidy Suppose the government wants to introduce some subsidy on good x. It has two op- tions: Per Unit subsidy or Lump-sum subsidy. Suppose consumers take all the subsidy benefit, so we don't need to worry about the subsidy division between the consumers and producers. (a) Suppose the government spends the same amount of money in either subsidy, which kind of subsidy would the consumers prefer? Why? Solution: The consumers would prefer the lump-sum subsidy, because they could obtain a higher utility. (b) Suppose consumers are indifferent between the two kinds of subsidies, which means under either subsidy, the consumers would obtain the same utility level. Which kind of subsidy would the government prefer? Why? Solution: The government would prefer the lump-sum subsidy, because its expenditure is lower.