Question

Finding the milk price high, government decides to reduce market price by giving subsidies to producers of milk. Analyse its effects on (a) GDP and (b) welfare.

Answer 1

Reducing market price of milk will encourage households to consume more milk . This in turn will raise production of milk. As a result GDP will rise.
Increase in consumption of milk will have positive effect on health of the people. This will raise efficiency and in turn welfare.