Question

Auto manufacturers are currently offering flex-fuel vehicles that are designed to run on ethanol gasoline mixtures. An economist recently analyzed the cost versus value consideration of these vehicles and found that the market is currently buying approximately the socially efficient amount of flex fuel vehicles. Under lobbying pressure from the car manufacturers and environmental groups, the federal government is considering a $3,000 subsidy paid per flex fuel vehicle sold. If this subsidy goes through, what would be the most likely impact on market efficiency?.

Answer 1

If government continues this subsidy of $3,000 per flex fuel vehicle sold, then in this case the market efficiency is most likely to decrease.

Subsidy is a kind of aid which is in monetary terms provided to both people as well as manufacturers to extend an economic and social support. Basically, subsidy is provided to uplift them socially as well as economically. Government normally provide subsidy in the form of reduction in per unit price of some essential consumer goods as well as producer goods.

Subsidies are designed to support or retain what are regarded to be essential components of the country's economy or infrastructural facilities. Even though the specific company or organizations involved may personally benefit from subsidies, economic experts conclude that subsidies weaken free trade and result in decrease in market efficiency.

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