Problem
Assume that the U.S. oil industry is competitive, characterized by constant cost, and is currently in a state of long-run equilibrium. In order to encourage the production of oil, the federal government gives firms in the oil industry a subsidy that is independent of the quantity of oil they produce (economists call this type of subsidy a lump-sum subsidy). Will the rate at which each oil-producing firm increase, decrease, or stay the same? How will the subsidy affect industry profits in the short run? What about the long run? How is consumer and producer surplus divided up in the long run? In other words, which group is the primary beneficiary of the subsidy?