ib-economics-quantitative

2. Identify the level of domestic production before the subsidy and after.Before the subsidy, domestic production is where the domestic supply curve meetsthe world supply curve, i.e. 500,000 litres.After the subsidy, domestic production is where the new domestic supply curve, S +Subsidy meets the world supply curve, i.e. 1 million litres.3. Calculate the amount of revenue for domestic producers before the subsidy andafter.Before the subsidy, domestic producers received 500,000 x 50c = $250,000.After the subsidy, domestic producers received 1 million x $1 (price of 50c and 50cper unit subsidy from the government) = $1 million.4. Identify the level of imports before the subsidy and after.Before the subsidy, imports start at the level of output where the domestic supplycurve meets the world supply curve, i.e. 500,000 litres, and finish where the worldsupply curve equals demand, i.e. at 2.5 million litres. Thus the level of imports is 2.5million – 500,00 = 2 million litres.After the subsidy, imports start at the level of output where the new domestic supplycurve, S + Subsidy, meets the world supply curve, i.e. 1 million litres, and finisheswhere the world supply curve equals demand, i.e. at 2.5 million litres. Thus the levelof imports is 2.5 million – 1 million = 1.5 million litres.5. Calculate the amount of revenue for foreign producers before the subsidy and after.Before the subsidy, foreign producers received 2 million x 50c = $1 million.After the subsidy, foreign producers received 1.5 million x 50c = $750,000.6. Calculate the amount of government expenditure on the subsidy.The government will pay 50c on each litre of oil that is produced domestically = 1million x 50c = $500,000. The area A + B in the diagram.7. Calculate the dead-weight losses suffered as a result of granting the subsidy.The dead-weight loss is represented by the area B.Area B is the extra cost to “the world” of the output that is now produced by inefficientdomestic producers, instead of efficient foreign producers = ½ x 500,000 x 50c =$125,000.Produced by Ian Dorton & Jocelyn Blink Page 60