The benefit of a subsidy accrues mostly to consumers:
A) in every instance.
B) if Ed/Es is large.
C) if Ed/Es is small.
D) if Ed and Es are equal.
E) in no instance.

Question

Quizplus · Accepted Answer

If Ed/Es is small, the subsidy will mostly benefit consumers. This is because a small Ed/Es means that the demand curve is relatively inelastic, so consumers will not reduce their consumption of the good very much in response to the higher price. As a result, the subsidy will mostly be passed on to consumers in the form of lower prices.

The Benefit of a Subsidy Accrues Mostly to Consumers