Question

People will tend to consume more of these goods than they would ideally want, because of the artificially lower prices. " How can people consume more food or clothing than they need if they are poor? Does an extra couple of percentage points on the price change the fact that these people have very tight budgets? Is it more efficient to increase public assistance for necessities?

Answer 1

People even if they are poor, has the future expectations about the economy and accordingly, they can store goods that will be consumed in the future. For this, they will apply substitution effect and they will buy goods whose prices come down. Change in price affect the basket of goods purchased even if budget is tight. Here, elasticity of demand will also play a role. Any good taking bigger portion of the budget, will be more elastic and if its price changes, then demand of these goods, will change. Demand of inelastic goods, will not change significantly, if the price of the goods change.

Increasing pubic assistance on necessity goods, will reduce the externality problem and market failure is prevented. So, it adds to the efficiency when assistance in the form of subsidies are given to people.