3. (3 pis.) Let's consider the welfare effects of agricultural support programs using a numerical example. Assume that the government is considering three general types
3. (3 pis.) Let's consider the welfare effects of agricultural support programs using a numerical example. Assume that the government is considering three general types of subsidies, (1) a price floor plus the government purchase of all surplus grain, (2) a price floor plus government payments to farmers to grow nothing and (3) direct government subsidy payments to farmers. Assume that the demand curve is Pa = 10 - Q. the supply curve is P's = 2 + Qs, the price floor is at $7, and the direct subsidy is $2 per bushel. a) Identify by letters in the Price Floor graph below the consumer surplus, producer surplus, government surplus, and total net gains for the competitive equilibrium and price floor programs (1) and (2) listed in this question. (Hint: They have very different deadweight losses). Do the same for the subsidy program in the Direct Producer Subsidy graph below. Direct Producer Subsidy Price Price Floor Price 10 Supply Supply + 10 subsidy Supply surplus Price Pe DE D Minimum P2 Pe 2 De Q2 Q1 02 03 Quantity QuantityA. Price Floor Graph Consumer Surplus = A Producer Surplus = F Government Surplus = D Total net gains for (1 ) and (2) = C + F Direct Producer Subsidy Consumer Surplus = A Producer Surplus = G Government Surplus = G Total net gains for (1 ) and (2) = D + E b) Based on the equations above, find the equilibrium P and Q, and the dollar values of the consumer surplus, producer surplus, and net gains for this market without government intervention. Equilibrium price = 6 Equilibrium quantity = 4 Consumer surplus = 6 Producer Surplus = 6 Net Gains without government intervention = 12c) Find the dollar values of the consumer surplus, producer surplus, and (negative) government surplus for all three programs. Find the key points in each graph first. What is the dollar value of the deadweight loss, compared to the net gains in part A, for each type of subsidy? 1) Price floor plus the purchase of all government surplus grain Consumer Surplus = 4 Producer Surplus = 4 (Negative) government surplus = Deadweight loss = 2) Price floor plus government payments to farmers to grow nothing Consumer Surplus = 6 Producer Surplus = 12 (Negative) government surplus = Deadweight loss = 3) Direct government subsidy payments to farmers. Consumer Surplus = 16 Producer Surplus = 12 (Negative) government surplus = Deadweight loss =
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