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Variable rate subsidies: the inefficiency of in-kind transfers revisited

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  • Michael J. Stutzer
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    The inefficiency of fixed rate consumer price subsidies, relative to cash transfers, is one of the best-known propositions in welfare economics. It has also been used to show that matching grants are a more inefficient intergovernmental aid than are lump sum grants. Furthermore, the cost of fixed rate subsidies cannot be controlled without providing a “cap” beyond which amount no subsidy is received. This paper reports, both qualitatively and quantitatively, that a broad class of variable rate price subsidies also dominates fixed rate subsidies on both counts. The relative inefficiency of matching grants compared to the variable rate Federal General Revenue Sharing program is estimated.

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    Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 76.

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    Date of creation: 1983
    Handle: RePEc:fip:fedmsr:76
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    1. Harvey S. Rosen, 1978. "The Measurement of Excess Burden with Explicit Utility Functions," NBER Chapters,in: Research in Taxation, pages 121-135 National Bureau of Economic Research, Inc.
    2. Kay, J. A., 1980. "The deadweight loss from a tax system," Journal of Public Economics, Elsevier, vol. 13(1), pages 111-119, February.
    3. Stutzer, Michael J., 1982. "Another note on deadweight loss," Journal of Public Economics, Elsevier, vol. 18(2), pages 277-284, July.
    4. Waldauer, Charles, 1973. "Grant Structures and Their Effects on Aided Government Expenditures: An Indifference Curve Analysis," Public Finance = Finances publiques, , vol. 28(2), pages 212-226.
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