1.Use the tools you acquired from the lectures to analyze the welfare effects of subsidies. Specifically, analyze the effects as follows.

(a)Use a supply and demand diagram to illustrate the equilibrium in the market for high-efficiency compact fluorescent light bulbs (CFLs).

(b)On the same graph, show the effects of a subsidy per CFL bulb paid to consumers. What happens to the equilibrium price and quantity?

(c)In your diagram, show what happens to consumer surplus and producer surplus before and after the subsidy.

(d)Show the area corresponding to the deadweight loss to society. Would your answer change if the government decides to pay the subsidy to producers instead?

2.Now suppose scientists discover that the widespread use and adoption of CFLs has a positive effect on the environment because CFLs are more energy efficient than traditional incandescent bulbs. Analyze the welfare effects of the CFL subsidy in light of this new information.

(a)Illustrate the market for CFL without subsidies, labeling the demand and supply curve, the social value and cost curves, the equilibrium quantity, and the efficient quantity of CFLs.

(b)In your diagram, shade the area corresponding to the deadweight loss to society without subsidies.

(c)Suppose the government chooses the amount of subsidy optimally so that the demand curve with subsidy coincides with the social value curve. What is the amount of deadweight loss to society with the subsidy?

(d)Why does your conclusion about the effects of subsidies change relative to the previous question?