Subsidy Effects on Producer Benefit and Government Cost

Steps:

• Identify post-subsidy equilibrium: quantity rises to Q' (at M), consumer price falls to P_c (at L), producer price rises to P_p (at N).
• Calculate producer incidence: gain from higher price (P to P_p) over new quantity (0 to Q'), forming trapezoid P-P-L-M.
• Determine government expenditure: total subsidy cost as per-unit subsidy (P_p - P_c, or N to L) times Q', forming rectangle P-P-N-L.
• Match choices: producer benefit P-P-L-M, expenditure P-P-N-L.

Why D is correct:

• D assigns P-P-L-M to producer incidence (price gain × Q') and P-P-N-L to expenditure (subsidy rate × Q'), per standard incidence analysis.

Why the others are wrong:

• A: Mislabels producer benefit as smaller area P-P-N-M, understating gain.
• B: Wrongly pairs P-P-L-M with P-P-L-N, confusing expenditure with consumer side.
• C: Incorrectly uses P-P-N-L for expenditure but mismatches producer area.

Final answer: D