微观经济学讲义PPT007.ppt

The graph makes it appear that a subsidy increases consumer surplus by $5 million. If this were the whole story, the government would not stop at lowering the price to $1. Total welfare would be increased if the government made everything free. We missed something. The government pays $12 million to buy the bread and it collects only $6 million from consumers. The government subsidy of $1 per loaf cost the government $6 million. The net benefit to our society is the consumer surplus of $9 million less the government losses of $6 million. Once again, moving the market away from equilibrium results in a lower level of total surplus. Lets look at the graph again. * This is where we left off. The subsidized bread created $9 million of consumer surplus. How do we show the government losses on the graph? The loss per loaf is the difference between the purchase price ($2) and the selling price ($1) or the distance between the original supply curve and the subsidized supply curve. Multiply that difference times the 6 million loaves to get the area of the red rectangle. The area of that rectangle is the government losses. Almost all of the red rectangle of government losses is offset by the increase in consumer surplus from the subsidized price. ALMOST. The yellow triangle represents the portion of government losses that are not offset by increased consumer surplus. This yellow triangle is our net loss of surplus from the subsidy. Its height is $1 and its width is 2 M loaves, so the welfare loss is $1 million. Once again, the power of the market over-rules the power of the government. The policy was intended to help, but it cost $1 million in consumer surplus. One way to look at that loss of consumer surplus is that consumers would be willing to pay up to $1 million to keep the government from enacting its subsidy program. If consumers paid the government $750,000, that would be their welfare loss – less than the $1 million from the government program. People are poor