In an effort to protect domestic olive oil producers from international competition, the French government is considering the introduction of an olive oil subsidy. Currently, in France the yearly demand for olive oil is Qd = 600 – 20P and the yearly supply of olive oil is Qs =40P-240. Quantity is measured in millions of liters and price in dollars per liter.
A. In a diagram, sketch the demand curve and the supply curves and clearly mark the market equilibrium price and quantity.
B. Using algebra, compute equilibrium price and equilibrium quantity.
The French government is considering paying oil producers $6 per litre of olive oil sold. If implemented, the subsidy shifts the supply curve down by $6 at every quantity.
C. In the diagram, illustrate the influence of the olive oil subsidy on the market equilibrium price and the market equilibrium quantity. D. Who would benefit the most from the olive oil subsidy, consumers or producers? Justify your answer.
E. After the subsidy is implemented, does the olive oil industry produce the socially optimal quantity of olive oil? Briefly explain.
F. Suppose the supply of olive oil was less price elastic. Would the olive oil subsidy create a larger or a smaller deadweight loss? Justify your answer.