Effect of a Subsidy
Suppose the low-income groups are supplied by the Government Dollie necessaries (say, housing accommodation) at subsidized rates, (i.e., lower price ). Most welfare States like to help poor citizens in the manner. Let us suppose that the governmental sew lies wheat at half price, theocratic half being a subsidy ‘nil’ question is whether tile benefit to the consumer the cost of the subsidy to the Godunov gives the answer.
Wheat is measured along OX and income lung YO. Suppose the individualist income is CO. If the whole of it 011 subsidized wheal. he would quantity hews. CU is the price line ghoulish subsidy, The subsidy being line with sun.
Somewhere between P and R, which means that the tax payer will work more than when he paid income tax. The reaction of the individual tax payers may vary. But it can be laid down as a general rule that if a fixed sum is taken away from a worker, it will restrict his output more (or increase it less) than in the of a progressive income tax.