An income subsidy would always be preferred over a price subsidy of equal magnitude (Graphically Illustrate)

An income subsidy would always be preferred over a price subsidy of equal magnitude

(Graphically Illustrate)

Expert Solution

The statement is true.

In the diagram above, AB represents the initial budget line of the consumer with IC1 as the initial indifference curve and point E1 as the initial consumption bundle of the consumer. Due to price subsidy, the budget line of the consumer will pivot to AB' and IC2 is the new indifference curve where E2 is the new point of consumption of the consumer where consumption of X has increased. On the other hand, income subsidy will shift the budget line outwards to A'B' and the consumer can move to a higher level of utility at IC3 where consumption of both good X and Good Y has increased. IC3 with income subsidy represents higher level of utility for the consumer as compared to IC2.

Rahul Sunny answered 3 years ago

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