Income eect change in consumption when budget

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Income e/ect: change in consumption when budget increasesSubstitution e/ect: change in consumption when relative price changesFood stampsIncome e/ect: increase consumption of food and other goodsSubsidizing food consumption (price subsidy)Income e/ect: increase consumption of food and other goodsSubstitution e/ect: relative price of food falls so increase consumptionof food and reduce consumption of other goodsOTSU(Sophia University FLA)IBE 316Spring 20089 / 16
E¢ ciency ConsequencesIncome and Substitution E/ects and Induced Ine¢ ciencyPrice subsidies will cause ine¢ ciencyThe total government payment for price subsidy is greater than theamount of food stamps that are needed to make the consumer equallybetter o/The di/erence between values of the price subsidy and the food stampsis dead weight lossThe e/ect on food consumption is stronger with price subsidyOTSU(Sophia University FLA)IBE 316Spring 200810 / 16
Distributional ConsequencesIncidence of a program: who actually bene°ts from or hurt by theprogramThe actual incidence is often di/erent from what was intendedOTSU(Sophia University FLA)IBE 316Spring 200811 / 16
Distributional ConsequencesEvaluating the Distributional ConsequencesHow do di/erent groups in society a/ected?intertemporal distribution e/ects in social security systemsprogressive (regressive) distribution e/ect: when a program±s bene°tsaccrue disproportionately to the poor (rich)Who are the real bene°ciaries?support for higher educationOTSU(Sophia University FLA)IBE 316Spring 200812 / 16

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