Do the people who are the government consider Price Elastici

Do the people who are the government consider Price Elasticity of Demand when granting subsidies to any product?

Solution

An industrialist can apply to government for grant of subsidy. The government considers the elasticity of demand of product. If demand is elastic ,subsidy is granted.The effect of a subsidy given to producers is influenced by the size of the subsidy and the price elasticity of demand. A subsidy being an extra payment to producers, shifts the supply curve to the right.If demand is elastic, a subsidy will have more impact on the quantity sold and less on the price.In deciding whether to grant a subsidy, a government has to consider the opportunity cost as the money which could have been used for another purpose.

As demand is inelastic, producers have to pass on most of the subsidy to encourage an extension in demand.