Suppose that the federal government grants a 50 cent per gallon subsidy to buyers of gasoline and that the demand for gasoline is highly inelastic while the supply is highly elastic. Under these circumstances, the benefit of the subsidy
A) will go primarily to producers.
B) will go primarily to consumers.
C) will be split equally between consumers and producers.
D) cannot be determined because the actual benefit of a subsidy is not influenced by the elasticities of supply and demand.

Question

Quizplus · Accepted Answer

When demand is highly inelastic and supply is highly elastic, consumers are less responsive to price changes, so they capture most of the benefit from the subsidy.

Suppose That the Federal Government Grants a 50 Cent Per