Policy comparison: subsidies and price ceilings The market for food is depicted in the graph below, with the relative elasticities of supply and demand as discussed last class. In attempts to keep the price of basic food items low, numerous countries employ price ceilings or subsidies. To compare these two approaches, show the effect of a subsidy that lowers the consumer price by the same amount as a price ceiling. Evaluate the two policies along these dimensions: 1. Price: By construction, the two policies should be equally effective at lowering the price paid by consumers. Is that correct? 2. Quantity: How well does the policy maintain the quantity exchanged and what does this depend on ?

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To compare the effects of subsidies and price ceilings on the market for food lets evaluate them along the dimensions of price and quantity 1 Price By ... View the full answer