Biology Forums - Study Force

The world price for oil is $31 per unit.  The supply of domestic oil is: QS = 0.15P - 2.7.  Domestic producers can sell as many units as they like at world prices.  Calculate current domestic producer surplus.  Now, suppose in an effort to boost domestic oil production the government pays producers $2 per unit produced.  Calculate the new level of producer surplus.  Also, calculate the amount the government spends in payments to domestic producers.  Does the change in producer surplus exceed the amount of payments made by the government?  If government directly paid domestic oil producers the amount they will spend in the subsidy scenario, would domestic oil producers be better off?

At the world price of $31 per unit, domestic oil producers will bring 1.95 units to the market.  The highest price where domestic producers will not bring any oil to market is $18.  Producer surplus is: PS =  (31 - 18)1.95 = 12.675.  If the government pays domestic oil producers an additional $2 per unit to produce oil, producers will raise quantity supplied to QS' = 0.15(31 + 2) - 2.7 = 2.25.  Producer surplus is: PS =   (31 + 2 - 18)2.25 = 16.875. The government is paying $2 per unit for each of the 2.25 units.  Total government payments are $4.50.  The increase in producer surplus is $4.20.  The increase in domestic producer surplus does not exceed the payments made by government.  If government directly gave oil producers $4.50 without the subsidy, oil producers would be better off.