In our discussion of economic versus statutory incidence, the text has focused primarily on the incidence of

Question:

In our discussion of economic versus statutory incidence, the text has focused primarily on the incidence of taxes. This exercise explores analogous issues related to the incidence of benefits from subsidies.
A. Consider a price subsidy for x in a partial equilibrium model of demand and supply in the market for x.
(a) Explain why it does not matter whether the government gives the per-unit subsidy s to consumers or producers.
(b) Consider the case where the slopes of demand and supply curves are roughly equal in absolute value at the no-subsidy equilibrium. What does this imply for the way in which the benefits of the subsidy are divided between consumers and producers?
(c) How does your answer change if the demand curve is steeper than the supply curve at the no-subsidy equilibrium?
(d) How does your answer change if the demand curve is shallower than the supply curve at the no-subsidy equilibrium?
(e) Can you state your general conclusion — using the language of price elasticities — on how much consumers will benefit relative to producers when price subsidies are introduced. How is this similar to our conclusions on tax incidence?
(f) Do any of your answers depend on whether the tastes for x are quasilinear?
B. In Section 19B.1, we derived the impact of a marginal per-unit tax on the price received by producers— i.e. dps /dt .
(a) Repeat the analysis for the case of a per-unit subsidy and derive dps/ds where s is the per-unit subsidy.
(b)What is dpd /ds?
(c) What do your results in (a) and (b) tell you about the economic incidence of a per-unit subsidy when the price elasticity of demand is zero? What about when the price elasticity of supply is zero?
(d)What does your analysis suggest about the economic incidence of the subsidy when the price elasticities of demand and supply are equal (in absolute value) at the no-subsidy equilibrium?
(e) More generally, can you show which side of the market gets the greater benefit when the absolute value of the price elasticity of demand is less than the price elasticity of supply?