A central market for a competitive industry is supplied by firms working in two different locally governed areas (A and B). The distance between them and the centre is the same. The local government in province A proposes to improve the lot of its public by offering a special bonus to all producers in their area.
(a) Describe the initial set-up of the market;
(b) Analyse the effects of the local policy on the market in the short-run;
(c) Assuming that for cultural reasons there is barely any labour mobility across provinces, what would happen to equilibrium price and quantity, the number of firms in each region and the level of each firm's output? Will the government improve the lot of its public?