Government Subsidy Reduction in Rice Market

Steps:

• Government policy reduces the subsidy on rice, shifting supply left from S1 (subsidized) to S2 (less subsidized).
• The vertical distance between S1 and S2 equals the per-unit subsidy reduction.
• Equilibrium moves left along the demand curve, lowering quantity supplied.
• Area JKLM is the rectangle of subsidy reduction per unit times the new lower quantity, measuring total saved government expenditure.

Why A is correct:

• JKLM equals the reduced subsidy payment (subsidy amount × quantity), representing direct cost savings to the government per fiscal policy definitions.

Why the others are wrong:

• B: Tariff removal shifts supply right and saves importers the tariff wedge × imports, not government costs.
• C: Maximum price creates shortage without shifting supply, increasing consumer surplus via price drop below equilibrium.
• D: Lump-sum tax reduction shifts supply right, causing revenue loss as fixed tax × fewer producers, not a gain.

Final answer: A