Subsidy Cost in Supply Shift Diagram

Steps:

• Policy shifts supply right from S1 to S2, indicating increased production like a per-unit subsidy to growers.
• New equilibrium lowers consumer price but raises producer price (original minus subsidy gap).
• Area JKLM measures the vertical subsidy wedge times horizontal quantity traded.
• This rectangle equals total government expenditure on the subsidy.

Why A is correct:

• Subsidy cost is per-unit payment (vertical distance between curves) times subsidized quantity, per standard microeconomic welfare analysis.

Why the others are wrong:

• B: Tariff removal affects import prices and deadweight loss, not domestic supply shift.
• C: Maximum price (ceiling) creates shortage, shifting demand or causing excess demand, not supply.
• D: Lump-sum tax cut raises revenue uniformly, not shifting supply curve rightward.

Final answer: A