A subsidy granted to an import-competing producer imposes a deadweight loss on the domestic economy equal to the redistribution effect plus consumption effect.

Question

Quizplus · Accepted Answer

A subsidy granted to an import-competing producer does cause a redistribution effect (transferring income from taxpayers to the subsidized producers) and may lead to a consumption effect (altering the quantities consumed due to changed prices), but the deadweight loss is typically considered to be the efficiency loss in the market due to the subsidy, not simply the sum of the redistribution and consumption effects. Deadweight loss also includes the production effect, where resources may be inefficiently allocated due to the subsidy.

A Subsidy Granted to an Import-Competing Producer Imposes a Deadweight