Efficiency In The Provision Of Consumption Subsidies

There are numerous devices which are used to affect individuals' consumptions of various goods—direct distributions of goods, vouchers, price‐reductions, etc. This paper investigates the efficiency aspects of these devices. In a simple two‐person model, it is shown that lumpsum transfers of a good whose consumption yields external benefits will lead to neither optimality nor equilibrium. But a price cut, an alteration of exchange ratios, can produce an optimal equilibrium. In a model in which there is one subsidy recipient and many benefactors, it is shown that in certain cases a transfer of the externality‐generating good, of an equal amount of money, or of some other good will all produce the same effect in the individual's consumption of the externality‐generating good. A price reduction on an ‘all‐or‐nothing’ subsidy scheme, in which the individual must pay a given amount for a given quality of the good or receive none at all, will lead to optimality. When there are many givers and many receivers, an efficient subsidy device will in general not be one which faces all individuals with the same conditions. Price reductions, all‐or‐nothing schemes, and legal standards are shown to be alternate ways of reaching optimality, differing mainly in the way in which they affect the distribution of real income.