Title: Market Effects of a In-Kind Subsidies
Published in: Working Papers Series
Author/s: James P. Houck*
In-kind price subsidies are a new and important feature of U.S. agricultural policy. Yet the market effects of such subsidies have not been widely discussed in the professional literature even through they differ importantly from similar cash subsidies. This paper examines in-kind subsidies with simple, static demand and supply functions. In-kind price subsidies push down prices to favored buyers and increase total sales relative to no subsidy or to an equivalent cash subsidy. Inventory holdings by the subsidizing authority are diminished. However, the effects of an in-kind subsidy upon prices received by sellers and commercial sales volume (net of stock disposals) are problematic, depending upon the price elasticity of demand in the subsidized market. If the demand, including retaliation by other sellers, is price elastic, then an in-kind subsidy will increase prices received by sellers and commercial sales volume. But if the demand is inelastic, then sellers’ prices and commercial sales volume will drop relative to a no-subsidy situation or to an equivalent cash subsidy. These conclusions do not depend upon the methods by which the scheme is administered.