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

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. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: This work was supported by the National Natural Science Foundation of China [Grants 71971184, 71972025, and 72032001], the Departmental General Research Fund of the Hong Kong Polytechnic University [Grant P0008761], and the Research Grants Council of Hong Kong [Grants 15504615 and 15500820]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4850 .