Question

The government wants to increase the overall health of its citizens. It decides it can do this by either (a) subsidising cycling, or (b) subsidising healthy eating. Reports suggest that both demand and supply for cycling is highly price-sensitive (or elastic), while both demand and supply for healthy eating have low price-sensitivity. To get the best bang-for-its-buck, should the government subsidise cycling, or healthy foods? (For ease of analysis, assume the current price and quantity are the same for healthy foods and cycling.)

Answer 1

We know the following:

% change in quantity demanded is more than the % change in price (in the opposite direction), for a good whose demand is price-sensitive or elastic.

% change in quantity demanded is less than the % change in price (in the opposite direction), for a good whose demand is low price-sensitive or inelastic.

Given the above, it makes more sense to subsidize cycling, since it would lead to a reduction in price which would make its demand go up more than proportionately.