Now, that has a couple of implications.
First, a subsidy allows consumers less willing to pay (the Q0 to crowd Q) to enter the market. However, consumers with even weaker willpower (the poorest of the poor, i.e. Q to Q1 crowd), which are often the main targets of these social policies, always end up missing out. Simply put, until the cost to each consumer is zero, the subsidies do not reach those most in need. But making it cost 0 is essentially giving it away for free!
Second, by introducing a subsidy into the market, the government is effectively creating deadweight loss in society. Simply put, the market has been distorted, which creates inefficiency in the market (in effect, you bring in consumers whose willingness to pay is below the break-even price and suppliers whose marginal cost is above the price. balance which leads to inefficiency).
Third, the subsidy doesn’t just go to consumers: producers also benefit (look at the extra production surplus created). Consumers pay the consumer price Pvs, but the suppliers get the producer price Ps. In other words, by the very nature of this graph, part of the subsidy also goes to producers.
So when does the grant actually work? If there are market failures – for example information asymmetry (case of MSP), high fixed costs (case of free vaccines) or positive externalities such as marginal social benefits (case of subsidized health care). education) – grants work better than cash.
But it is not that simple. Even in these cases, granting grants requires a lot of information. You have to understand the consumer’s willingness to pay, the marginal costs of the supplier, their profitability structure, the elasticity of the graphics, and finally analyze the equilibrium price.
There are also other qualitative arguments to this debate:
Paternalism is one of them. A question even debated among economists is: “Do the poor know what is good for them?” For example, we want every child to study and therefore have programs like lunches and free public education. But what if the poor prefer to spend this money to buy more fertilizer for their land? By fixing the potential use of the subsidy, are we not restricting the choices of the poor (being paternalistic)?
Cash transfers take a more liberal approach to this problem: give the money to the poor and let them choose. No one wants to stay poor at the end of the day. This argues in favor of a cash transfer versus an in-kind transfer.
Then there is exclusion error. Why not just select the poor and give them money? The problem is, targeting isn’t as easy as it sounds. It is often very expensive, has high exclusion errors, and suffers from massive corruption issues. For example, MGNREGA, which is often credited with being self-selected because the very nature of the program requires extreme manual labor for minimum wage, suffers from leakage. While the government has tried to solve this problem by creating Jan Dhak bank accounts linked to Aadhaar cards, there is still a long way to go.
This is what pleads in favor of the universality and unconditionality of monetary transfers. Let everyone get it. This will reduce leaks while helping those most in need. And as the government makes targeting more effective through bank accounts and Aadhaar, there may be programs like voluntary abandonment of grants, similar to what the government did in the Ujjwala program.
Some of you can discuss the enormous economic burden that such policies often involve. While this is theoretically true, in practice, governments often earn more because of the fixing of leaks in grants. Kejriwal, when asked how he would fund Rs 8,000 crore for cash transfers to Punjab, made a similar point. , âThe key for the government is to fix corruption and leaks. We expect this in itself to save the government Rs 20,000-54,000 crore. “
In short, the promises of the surveys regarding cash transfers are not mere freebies. They are economically proven and, if executed correctly, can work wonders. Cash transfers, especially to women, will greatly contribute to the financial empowerment of 50 percent of the population, with a positive impact on women’s health and education, and.
He is also expected to play an important role in tackling the drug threat in the Punjab, which has destroyed the lives of thousands of young men in the Punjab; several studies have shown that the money in the hands of women is. This is also called the âsecond bestâ theory, where repairing one market failure (poverty) also ends up repairing another market failure (the oppression of women). The positive contribution of increased consumer spending to GDP due to the increase in cash on hand is clearly visible in the fact that Delhi recorded a 7.4 percent during those years.
To be fair, however, good financial management will be the key to the success of this program. The Punjab has accumulated and has a collapsing state economy. For the AAP, which prides itself on being able to double Delhi’s government budget in five years and leading one of the few surplus governments in the country, it will be a daunting task. But it is certainly a progressive step in Indian politics – moving away from the politics of religion and focusing on governance and social welfare – with policies verified and marked by economics as having an impact.