Question:
If the government grants a per unit subsidy to the producers of this agricultural commodity, how will the economic surplus be distributed between producers and consumers?
(1) The majority of economic surplus will go to consumers.
(2) The majority of economic surplus will go to producers.
(3) The economic surplus will entirely go to producers.
(4) The economic surplus will entirely go to consumers.
(5) The economic surplus will be shared equally.
Correct Answer:
(2)
Answer Explanation:
The incidence (or benefit) of a subsidy depends on the relative elasticities of demand and supply. Agricultural commodities are fundamentally characterized by highly inelastic demand curves. Because consumers are highly inflexible, a supply shift caused by a subsidy results in a massive drop in the market price, meaning consumers capture the majority of the economic surplus.
Topic: Subsidies Year: 2019
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