Analyzing Subsidies in Microsoft Excel

Publication: Journal of Economic Education

Volume: 36, No. 2

Issue: Spring 2005

Pages: 199

Author(s): J. Wilson Mixon

Address (Principal Author):

J. Wilson Mixon
Dana Professor of Economics

Campbell School of Business

Berry College

Fax Number: 706.238.7854

Office Phone: 706.290.2679

Internet Address (Principal Author): wmixon@berry.edu

Title: Analyzing Subsidies in Microsoft Excel

URL: http://www.campbell.berry.edu/faculty/economics/subsidies/subsidies.shtml

Descriptive Note:

Applying the budget line/indifference curve apparatus to policy issues reveals important and sometimes counterintuitive policy implications. Also, it provides practice in using the apparatus. The author applies these tools to subsidies. The analysis follows textbook treatments, but is extended at some points. In particular, the present analysis explicitly models consumer behavior when the consumer is also the taxpayer.  The approach uses Microsoft Excel workbooks to depict a variable-quantity subsidy (housing) and a fixed-quantity subsidy (schooling). In each case, a Cobb-Douglas utility function represents consumer preferences. The budget sets reflect the policy being analyzed.

With housing, the model shows the effect of providing a variable-quantity subsidy, including the demonstration that the consumer would prefer a lump-sum cash payment to a subsidy. It then removes the transfer effect by requiring that the consumer pay a tax equal to the subsidy. Doing so requires imposing that the consumer must be simultaneously on the real budget line and on the apparent budget line created by subsidy. Excel shows students the nature of the constraints involved.

Analyzing schooling shows that for three classes of consumers, a fixed-quantity subsidy reduces schooling for two. Both types of consumers would choose more than the politically-determined quantity. One type opts for the zero-priced, government provided schooling. The other chooses to purchase schooling outside the government operated system, but buys less than before because paying for the government-operated schooling reduces income. The analysis also shows that a voucher program replicates the laissez-faire outcome for these two classes of consumers. For the third class, those who would buy less than the politically-determined level, the voucher system yields the same quantity that the consumer would choose when schooling is offered free of charge.

Recently Published Web Sites

Spring 2005 Table of Contents
Online Section
Journal of Economic Education WWW Page