Question

A simple subsidy (s) reduces the price of a good from P to P-s. In contrast, a voucher scheme grants to the consumer the ability to consume a stated quantity of the good (label it X1s on the horizontal axis) in exchange for the voucher (which has no cost).

A: Illustrate and explain why a voucher scheme would be particularly effective in encouraging the consumption of the vouchered good for consumers who would otherwise have chosen little or none of the commodity. The voucher has no cost to the consumer and it cannot be sold.

B: Suppose the voucher is for housing. Explain how introduction of a voucher into a market where it did not exist before will affect the market price of housing and the feasible budget set for the consumer.

Answer 1