Price & Other Subsidies

Many governments use price and tax subsidization to meet social protection objectives in lieu of, or in addition to, direct income transfers.  The rational for using such subsidies rather than cash transfers is based, in part, on the potential to shift consumption or behavior as well as on administrative considerations.  There is substantial evidence, in fact that price, food subsides, and food stamps encourage increased consumption, possibly due to changes in the share of resources controlled by women.

On the other hand, while these subsidies do lead to increased consumption towards a commodity in keeping with policy objectives, they may also distort production incentives.  Still, governments may also choose price subsidies because they are easier to administer than income transfers.  In many cases they may also be politically more tractable.

The most common form of price subsidy is an untargeted direct subsidy.  However, various other means may be used to deliver price subsidies as well.  These are: exemptions on value added or other sales taxes; untargeted indirect price subsidies (such as for transport or storage); and dual exchange rates, which include export taxes, producer quotas, subsidies on transport and storage, and domestic sales of a commodity below international opportunity cost.  Rationed subsidies (quotas), which include untargeted parallel market channels for the general population, targeted access to subsidized goods, and coupons, vouchers, and stamps, are also used to achieve the same social protection objectives.  Subsidies on goods available in a rationed amount are a less costly alternative to open ended subsidies on the entire supply of a good.

The incidences of benefits from a general price subsidy are proportional to purchases and can be deduced from a survey of expenditures.  In many cases these benefits are larger for wealthier households yet, even in such cases, the benefits may represent a larger share of the budget of the poor.  The share of transfers to the poor increases if governments chose to subsidize goods for which consumption declines as incomes increase.  These are termed self-targeted commodities.  A few such commodities or grades of commodities exist, but it is less common that they represent a substantial share of budgets for even target populations.