APFIVE Effect of a Producer Subsidy on Surplus
In a perfectly competitive market, what is the effect of a government subsidy granted to producers on consumer surplus and producer surplus?
A
It increases consumer surplus but decreases producer surplus as the market price falls below the cost of production.
B
It increases both consumer and producer surplus due to lower equilibrium prices and increased quantity.
C
It has no effect on consumer or producer surpluses because subsidies do not alter market equilibria in competitive markets.
D
It decreases both consumer and producer surplus due to higher equilibrium prices and decreased quantity.
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