Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

Question

Quizplus · Accepted Answer

Subsidies lead to a situation where the quantity supplied exceeds the equilibrium quantity. This results in a deadweight loss because the cost of producing the additional units (marginal cost) is higher than what consumers are willing to pay for them, leading to an inefficient allocation of resources.

Why Is There a Deadweight Loss Associated with Subsidy Payments