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5 Subsidy A subsidy is a payment from the government to producers (or sometimes consumers which we will cover another day) that lowers production costs and encourages greater output. Normally, subsidies shift the supply curve to the right because producers can offer more at every price. This rightward shift decreases the market equilibrium price and increases equilibrium quantity. As a result, both consumer surplusand producer surplus increase. A subsidy also generates deadweight loss (DWL) · Co
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