“Subsidy Reforms and Poverty Alleviation” by Parkash CHANDER
This paper presents a general framework for characterizing the optimal pattern of subsidies for poverty alleviation under budgetary constraints and suggests possible reforms for the existing pattern of subsidies. We adopt a discrete choice model in which individuals can make indivisible and mutually exclusive purchases from among n substitute goods differing in quality. It is assumed that producers behave competitively and each consumer's utility function is such that his/her willingness to pay for quality increases with income. The government may subsidize or tax goods in order to meet its objectives. The study introduces the concept of a consumer equilibrium and shows that there are cases of equilibria in which reforms can generate not only fiscal savings but also Pareto improve the welfare of both the poor and wealthy consumers.