Which of the following statements about subsidies is accurate?

• A. Subsidies have no effect on consumer surplus.
• B. Subsidies always decrease the price received by producers.
• C. Subsidies generally increase the equilibrium quantity of a good in the market.
• D. Subsidies are a form of tax imposed on consumers.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand what a subsidy is in microeconomics. A subsidy is a payment made by the government to producers or consumers to encourage the production or consumption of a good, effectively lowering the cost of production or the price paid by consumers.
2. Step 2: Analyze the effect of a subsidy on the supply curve. Since subsidies reduce production costs, the supply curve shifts to the right (increases), meaning producers are willing to supply more at every price level.
3. Step 3: Consider the impact on equilibrium quantity and price. With the supply curve shifting right, the new equilibrium quantity increases, and the price paid by consumers typically decreases, while the price received by producers may increase or remain higher than before the subsidy.
4. Step 4: Evaluate the effect on consumer surplus. Because the price consumers pay generally decreases and quantity increases, consumer surplus usually increases, so the statement that subsidies have no effect on consumer surplus is inaccurate.
5. Step 5: Review the other statements: subsidies do not decrease the price received by producers; rather, they tend to increase it or keep it stable. Also, subsidies are not taxes; they are payments, so the statement that subsidies are a form of tax is incorrect.