The incidence of a subsidy refers to how the benefits of a government subsidy are distributed between consumers and producers in a market. This distribution primarily depends on the price elasticity of demand (PED) and the price elasticity of supply (PES).

• If demand is relatively price elastic, producers capture a larger share of the subsidy benefit, as consumers are more responsive to price changes and thus gain less from the lower effective price.
• If demand is relatively price inelastic, consumers receive a greater portion of the subsidy, since they are less sensitive to price reductions and benefit more from the subsidy-induced price drop.
• Similarly, a more inelastic supply curve means producers gain more, while elastic supply shifts more benefit to consumers.

Understanding subsidy incidence is crucial in A-level Economics for analyzing market interventions and their welfare effects.