The world price for oil is $31 per unit. The supply of domestic oil is: Domestic producers can sell as many units as they like at world prices. Calculate current domestic producer surplus. Now, suppose in an effort to boost domestic oil production the government pays producers $2 per unit produced. Calculate the new level of producer surplus. Also, calculate the amount the government spends in payments to domestic producers. Does the change in producer surplus exceed the amount of payments made by the government? If government directly paid domestic oil producers the amount they will spend in the subsidy scenario, would domestic oil producers be better off?

Question

The world price for oil is $31 per unit. The supply of domestic oil is:  Domestic producers can sell as many units as they like at world prices. Calculate current domestic producer surplus. Now, suppose in an effort to boost domestic oil production the government pays producers $2 per unit produced. Calculate the new level of producer surplus. Also, calculate the amount the government spends in payments to domestic producers. Does the change in producer surplus exceed the amount of payments made by the government? If government directly paid domestic oil producers the amount they will spend in the subsidy scenario, would domestic oil producers be better off?

Quizplus · Accepted Answer

The Answer of The world price for oil is $31 per unit. The supply of domestic oil is:  Domestic producers can sell as many units as they like at world prices. Calculate current domestic producer surplus. Now, suppose in an effort to boost domestic oil production the government pays producers $2 per unit produced. Calculate the new level of producer surplus. Also, calculate the amount the government spends in payments to domestic producers. Does the change in producer surplus exceed the amount of payments made by the government? If government directly paid domestic oil producers the amount they will spend in the subsidy scenario, would domestic oil producers be better off?

The World Price for Oil Is $31 Per Unit