Question

Why does an excise subsidy on health care expand health care consumption more than a lump-sum subsidy on health care?

Answer 1

ANSWER: Both excise subsidy and the lump-sum subsidy have an income effect on consumption, however the excise subsidy will involve both an income effect and a substitution effect, thus reduces the price of the subsidised good, nominal income of the individual remaining constant. Consequently the consumption of the health care will increase by a higher amount when the excise subsidy is provided instead of a lump sum subsidy because it lowers the relative price of health care