Discuss why subsidy would lead to an inefficient allocation

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Question: In 2004, Congress voted to subsidize the pure-chase of capital goods in the manufacturing sector. Nonmanufacturing industries are not eligible for the subsidy. Using the discussion sur-rounding Figure. Discuss why this subsidy would lead to an inefficient allocation of capital between the manufacturing and nonmanufacturing sectors.

(Hint: Reinterpret the horizontal axis as measuring the total amount of capital M the economy, and the two curves as measuring the value of marginal product of capital in the respective sectors.) Also show on your diagram the amount of the excess burden generated by the manufacturing subsidy.

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Reference no: EM131490635

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