Contrasting price and income subsidies
Consider the Smiths, a low-income family which has a $400 income to spend on food (F) [market price = Pmkt = $10 per meal] and other goods.
Option 1: the government offers
a 50% food price subsidy, so the Smiths pay a subsidized price = Psub = $5 per meal
Option 2: the government offers the
Smiths a utility-equivalent income subsidy.
| Numerical value | |
| Total cost to the government of the food price susidy | |
| Total cost to the government of a utility-equivalent income subsidy: |
Why do the costs to the government of the two policies differ?