Question

The government has $100 per month with which to subsidize supermodel Kate Moss’s food consumption. It...

The government has $100 per month with which to subsidize supermodel Kate Moss’s food consumption. It is considering two alternatives: giving Kate $100 worth of food stamps per month or paying part of the price of food, thereby lowering the price to Kate. In the case of the excise subsidy, the price is lowered to the point where the total cost of the subsidy is $100 per month. Which type of subsidy will benefit Kate more? Under which type of subsidy will she consume more food?

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Answer #1

Lowering the price will benefit Kate more because lower price increases her purchasing power, the new saved money can be either used to buy food or to buy other goods. Kate now has the liberty to spend money how she wants to. This gives her more satisfaction because with food stamps she can just buy food.

Under subsidy of food stamps she will consumer more food as she can just buy food with food stamps and nothing else. So to utilise food stamps she is most likely to consume food.

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