The Impact of Input and Output Farm Subsidies on Farmer Welfare, Income Disparity, and Consumer Surplus

Christopher S. Tang (), Yulan Wang () and Ming Zhao ()
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Christopher S. Tang: Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
Yulan Wang: Faculty of Business, The Hong Kong Polytechnic University, Kowloon, Hong Kong
Ming Zhao: School of Economics and Management, University of Electronic Science and Technology of China, Chengdu 610054, China

Management Science, 2024, vol. 70, issue 5, 3144-3161

Abstract: Because of a growing population and shrinking arable land, the world is facing a global food crisis. One important solution could be to subsidize farmers to sustain their production so that they can produce more food for consumers and earn more money for themselves. An efficient subsidy program should also aim to reduce income inequality among farmers, as measured by the Gini coefficient of farmers’ income. In this paper, we examine and compare the effects of input and output farm subsidy programs. The input subsidy reduces the farmers’ input purchasing costs, whereas the output subsidy reduces the farmers’ output processing costs. By considering a continuum of infinitesimal price-taking farmers who are heterogeneous in their average yield rates, our equilibrium analysis of a game-theoretical model yields three results. First, both subsidy schemes reduce the aggregate income inequality measured by the Gini coefficient. However, they create the following “opposite” effects: the input subsidy decreases the income gap among farmers (under mild conditions), whereas the output subsidy increases it. Second, farmers with low yield rates prefer the input subsidy, whereas farmers with high yield rates prefer the output subsidy. Third, the output subsidy scheme is more effective in improving the total farmer income than the input subsidy scheme, whereas the input subsidy scheme is more effective in reducing income disparities and improving consumer surplus than the output subsidy scheme. Our results provide new insights for policymakers who are crafting subsidy schemes.

Keywords: subsidy scheme; farmer welfare; consumer surplus; Gini coefficient; game theory (search for similar items in EconPapers)
Date: 2024
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