A government wants to increase the use of solar panels by offering a \$100 subsidy for each solar panel purchased. The addition of this subsidy will:

• A. Increase the quantity supplied
• B. Decrease the quantity supplied
• C. Create a deadweight loss in the market for solar panels
• D. Both (a) and (c)

Answer: (D)

Verified step by step guidance

1. Understand the concept of a subsidy: A subsidy is a financial assistance provided by the government to encourage the production or consumption of a good. In this case, the government offers a \$100 subsidy for each solar panel purchased.
2. Analyze the effect of the subsidy on supply: A subsidy effectively lowers the cost of production for suppliers, which typically leads to an increase in the quantity supplied as producers are willing to supply more at each price level.
3. Consider the impact on market equilibrium: With the subsidy, the supply curve shifts to the right, leading to a new equilibrium with a higher quantity of solar panels sold and potentially a lower market price.
4. Examine the concept of deadweight loss: Deadweight loss occurs when market transactions are not at their most efficient level, often due to external interventions like taxes or subsidies. The subsidy can lead to overproduction, where the cost of producing additional units exceeds the value to consumers, creating inefficiency.
5. Conclude with the combined effects: The subsidy increases the quantity supplied and can create a deadweight loss due to the inefficiency introduced in the market. Therefore, both (a) and (c) are correct.