Unformatted text preview: 6.g. A Subsidy Versus a Cash Gift Many goods receive government subsidies: education, health care, and rail transit, to name a few. An important question for any consumer to ask is “Would I rather have the subsidy? Or would I rather have my share of the money the government spent on the subsidy?” For example, if the government’s subsidy to your education were $20,000 per year, you might reasonably prefer to have the government give you the $20,000, which you could then use to buy an education on the private market, or to buy some other good that you might value more than education. We can use figure 6.g.1 to show that a rational consumer will always prefer a cash gift to an equal-valued subsidy to some good. A consumer’s initial optimum is at point A, consuming a combination of education x and other goods y. A subsidy to education would make education cheaper, causing the budget constraint to rotate outward as shown. The consumer’s new optimum would be at point B, along the budget line labeled rotate outward as shown....
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.
- Spring '07