If the government provides a subsidy in one industry and raises the tax revenue by taxing another industry, would, other things equal, cause welfare costs in both industries.

Question

Quizplus · Accepted Answer

When the government provides a subsidy in one industry, it creates an artificial advantage over other industries leading to allocation inefficiencies. On the other hand, when it raises taxes in another industry, it leads to higher costs and prices for consumers and lower profits for firms. Both these factors can cause welfare costs in both industries, as they affect the efficient allocation of resources and reduce overall economic welfare.

If the Government Provides a Subsidy in One Industry and Raises