Price (HKDs/litre) Quantity demanded (millions of litre/year) Quantity supplied (millions of litre/year)

10 320 0

20 240 0

30 160 80

40 80 160

50 0 240

The table above shows the demand and supply schedules for milk in Hong Kong. A subsidy on milk of $10 per litre proposed and the government asks you to examine the effects of the subsidy.

i) Draw the demand and supply curves. If there is no subsidy, what is the price of milk and how many litres are sold?

ii) With the subsidy, what is the price that consumers pay? What is the price that sellers receive? How many litres of milk are sold?

iii) Assuming no external costs and benefits, what is the efficient level of milk production? Explain.

iv) With the subsidy, what is the marginal social benefit from milk? What is the marginal social cost of milk? If the subsidy is introduced, will the level of production be efficient? Why or why not?