Question

Governments can use subsidies to increase demand. For instance, the government can pay farmers to use organic fertilizers rather than traditional fertilizers. That subsidy increases the demand for organic fertilizer. Consider two industries, one in which supply is nearly vertical and the other in which supply is nearly horizontal. Assume that firms in both industries would prefer a higher market equilibrium price because a higher market equilibrium price would mean higher profits. Which industry would probably spend more resources lobbying the government to increase the demand for its output? (Assume that both industries have similarly sloped demand curves.) The industry with a nearly flat supply curve. The industry with a nearly vertical supply curve.

Answer 1

Industry in which supply curve is horizontal indicates perfectly elastic supply curve which means suppliers are not able to get the benefit of subsidy. Supply is highly responsive to any price change and this indicates that the entire subsidy is going to benefit to consumers. Industry in which supply curve is vertical will result in all the subsidy going to the suppliers. This happens because the relatively inelastic side of the market enjoys greater proportion of subsidy. In that manner they will be willing to lobby the government because they have higher profits in this case

Select the industry with nearly vertical supply curve.