Sanjay has an ATV that he values at $3,000. Marilu is looking for a similar ATV but will only pay up to $2,400

Will trade between these two occur? Is there a policy government could implement that would encourage a trade to occur between Sanjay and Marilu? If so, what is that policy and will the policy make society richer?


In a free market, no trade will take place. Government could subsidize the trade to encourage the trade to take place. If the government offered a subsidy of $700 to ATV buyers, Marilu could spend up to $3,100 on the ATV but only be $2,400 out of pocket, so there is no consumer surplus. Sanjay would receive $3,100, so his producer surplus is $100. This total gain in surplus of $100 is offset by the $700 loss to taxpayers, so society ends up $600 poorer.

Economics

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Economics