Final answer:
When a subsidy is provided to corn farmers, it increases the quantity supplied at every price and shifts the supply curve to the right. Removal of the subsidy has the opposite effect, causing the supply curve to shift to the left. Subsidizing encourages more production, while taxing reduces it.
Step-by-step explanation:
If the government subsidizes the production of corn by paying corn farmers $2 for every bushel of corn, the quantity supplied of corn is greater at each price, and the supply curve of corn shifts to the right. The removal of the subsidy shifts the supply curve of corn to the left. A rough rule of thumb is that we get more of what we subsidize and less of what we tax.
When the government provides a subsidy, it acts like a reduction in the cost of production for the farmers. This effectively lowers their costs, allowing them to supply more at every price level, represented by a rightward shift in the supply curve. This means there will be a greater quantity of corn supplied at each and every price than there was before the subsidy. Conversely, if the subsidy is removed, farmers' costs return to their initial level, and they'll supply less at every price, resulting in a leftward shift of the supply curve.
These changes in the supply curve have important implications for market equilibrium. With a subsidy, the equilibrium price may decrease as more quantity is supplied, sometimes even leading to a market price that is lower than the cost of production for competitors, particularly those in foreign markets. Without the subsidy, the price can increase as the supply decreases. Both cases demonstrate how government intervention in the form of subsidies can significantly alter market outcomes and create surpluses or shortages.