Suppose bread is subsidized in a small Caribbean nation with a high percentage of citizens who live in

poverty. The subsidy is paid to suppliers of bread by

the government in the amount of 50 pesos per loaf. In

the absence of the subsidy, the price of bread would

be 100 pesos per loaf. Assuming that the supply of

bread is perfectly elastic at the 100 peso price, show

the effect of the subsidy on the market equilibrium

price of bread. Assuming no externalities, show that

the subsidy will result in more than the efficient

amount of bread being produced. Show the excess

burden of the subsidy on your graph. Explain why

the subsidy will provide benefits to the nonpoor as

well as the poor.