The federal government pays airlines to service small cities in the United States through a subsidy program called Essential Air Service which was established in 1978 when the airline industry was deregulated. Most subsidies can't exceed $200 per passenger. What would happen if the government increased the subsidy to $400 per passenger?

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Increasing the subsidy would likely lead to a fall in price and an increase in quantity produced, as airlines would be more willing to serve small cities with the higher subsidy, thus increasing supply and reducing costs for consumers.

The Federal Government Pays Airlines to Service Small Cities in the United