A Subsidy to Sellers
A per-unit subsidy shifts supply right, lowering the price buyers pay and raising quantity.
A Subsidy to Sellers
Supply and DemandA per-unit subsidy shifts supply right, lowering the price buyers pay and raising quantity.
Equilibrium at Quantity 57, Price ($) 44
Start in equilibrium
The market begins at a single equilibrium price and quantity, with no government involvement.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Subsidy to Sellers, step by step
- 1
Start in equilibrium
The market begins at a single equilibrium price and quantity, with no government involvement.
- 2
The subsidy arrives
The government pays sellers a fixed amount for every unit sold. Each unit is effectively cheaper to produce, so at any price sellers will offer more. Supply shifts right.
- 3
The price buyers pay falls
The new intersection sits at a lower price and a higher quantity, so buyers get more units for less money each.
- 4
Sellers still end up better off
Sellers receive the lower market price PLUS the subsidy, which together exceed what they got before. That is the mirror image of a tax: the wedge now favours both sides instead of penalising them.
- 5
It is still inefficient
Quantity has been pushed past the point where the value of a unit to buyers equals its cost to make, so the extra units cost more to produce than they are worth. A subsidy creates deadweight loss just as a tax does, by moving quantity away from equilibrium in the other direction.
Where it ends up
Buyers pay less, sellers receive more, and quantity rises past the efficient level.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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