Question

Suppose the government begins subsidizing the production of goobers (e.g., paying firms a dime for each goober they harvest and sell). Which of the following is true?

a. the subsidy transfers wealth from people in the goober market to people elsewhere

b. the subsidy transfers wealth from people elsewhere to people in the goober market

c. the subsidy raises our total wealth, because it makes goober consumers and goober producers better off, at no cost to anyone else

d. only b and c are correct

e. none of the above are correct

Answer 1

Correct Answer:

B

Subsidy helps increase the output and price reduces in the market. It helps consumer surplus to increase. But, the subsidy is the fund that is procured by the government from some other tax payers. Hence, it is transfer of wealth from one set of people to another set of people who are in Goobers market.