In a perfectly functioning market, a subsidy to consumers will lead to: a.An increase in demand and deadweight welfare loss from underproduction. b.An increase in demand and deadweight welfare loss from overproduction. c.A decrease in demand and deadweight welfare loss from underproduction. d.A decrease in demand and deadweight welfare loss from overproduction.

In a perfectly functioning market, a subsidy to consumers will lead to:
a.An increase in demand and deadweight welfare loss from underproduction.
b.An increase in demand and deadweight welfare loss from overproduction.
c.A decrease in demand and deadweight welfare loss from underproduction.
d.A decrease in demand and deadweight welfare loss from overproduction.

Answer

• a.An increase in demand and deadweight welfare loss from underproduction.
  Explanation:
  When the government offers consumers a subsidy, the quantity of goods demanded will exceed the quantity produced, this causes an inefficiency in the market that is called deadweight loss. This inefficiency results because of underproduction, as more consumers are willing to buy the good, but producers are unwilling to increase the supply because of equilibrium price concept,