5.3 Effects of Government Policies on Consumer Welfare

Economists use the various consumer welfare measures to answer questions about the effect on consumers of government programs and other events that shift consumers’ budget constraints. If the government imposes a quota, which reduces the number of units that a consumer buys, or provides a consumer with a certain amount of a good (such as food), the government creates a kink in the consumer’s budget constraint. In contrast, if the government subsidizes the price of a good (such as a childcare subsidy) or provides cash to the consumer, it causes a rotation or a parallel shift of the budget line.

Quotas

Consumers’ welfare falls if they cannot buy as many units of a good as they want. As a promotion, ...

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