In a perfectly competitive market, which of the following will not occur as a result of a subsidy?
A)The market will overproduce relative to the efficient level.
B)Consumer surplus will be higher than with no subsidy.
C)Producer surplus will be higher than with no subsidy.
D)There will be no deadweight loss from the subsidy.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, a subsidy eliminates the gap between the market price and the cost of production, thereby increasing producer surplus and decreasing consumer surplus. However, since the market is perfectly competitive, the subsidy will lead to an increase in supply, causing the price to fall and the quantity to rise. This increase in production will not cause the market to overproduce relative to the efficient level since this is already achieved in a perfectly competitive market. Additionally, since there are no market distortions, there will be no deadweight loss from the subsidy. Therefore, D is the correct answer. In a perfectly competitive market, a subsidy will not result in a deadweight loss because the subsidy will be fully passed on to consumers in the form of lower prices. Therefore, the market will produce the efficient level of output, and there will be no deadweight loss. However, consumer and producer surplus will increase with the subsidy.

In a Perfectly Competitive Market, Which of the Following Will