Establishes quantity subsidy on the consumption of a good

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If the government establishes a quantity subsidy on the consumption of a good, it means that the consumer has to pay for each unity of the good its price minus the subsidy. That is, the price of the good becomes, in the consumer’s point of view, p − s, where p is the price of the good and s is the subsidy.

Suppose the budget line is given by p1x1 + p2x2 = m. The government decides to impose a quantity tax of t on good 1 and a quantity subsidy of s on good 2. What is the formula for the new budget line? Can you tell whether it becomes flatter or steeper?

Reference no: EM13998784

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