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Which of the following are the effects of a subsidy to producers? More than one answer may be correct.

Options
A.The quantity of the product increases to the economically optimal quantity, eliminating the overallocation of resources.
B.The subsidy reduces the marginal cost of producing the good.
C.The supply curve shifts to the right because of an increase in supply.
D.The supply curve shifts to the left because of a decrease in supply.
E.The quantity of the product increases to the economically optimal quantity, eliminating the underallocation of resources.
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Step-by-Step Analysis
To evaluate the effects of a subsidy to producers, I will go through each stated option and assess its accuracy in standard supply-and-demand terms. Option 1: The quantity of the product increases to the economically optimal quantity, eliminating the overallocation of resources. This statement mixes two ideas. A subsidy lowers producers' marginal costs and tends to increase quantity supplied, moving the market toward a higher quantity. However, whether that new quantity coincides with the economically optimal (socially efficient) quantity depends on the presence of externalities and the alignment of priva......Login to view full explanation

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