Food Security For The Urban Poor:Price VS Income Subsidy

Following the world food crisis during2007-08, Chinese domestic grain price rose sharply in2010. Grain is the necessity for daily life, the urban residents are net-consumers, when non-grain price and nominal income remain unchanged, and the rise of grain price will reduce the quality of commodities including grain or what they can buy or both. But the impact is different among all urban groups divided by income-level. Empirical results indicated that the lower-income group will be hurt more in food security, and the distribution of grain and grain welfare will be unfavorable for them when grain price goes up. Constrained by income, low-income group can only cover grain expenditure for basic life, and the distribution of grain and grain welfare is unfavorable for them. If grain price rise threaten their grain security more, worsen the distribution of grain and grain welfare, and it will create strong dissatisfaction, even bring about serious social problems, so it is necessary to support urban low-income group when grain price increases.Purchase is the most popular way for urban residents to get food for individuals, grain purchasing power of individuals depends on both price and disposable income. When gain price goes up, policy-maker can use price subsidy to keep grain price equal to initial level or below equilibrium, and ensure urban low-income group to buy enough food to meet their basic life needs, they also can use income subsidy to enhance their purchasing power after grain price rises, which is decided by market, it means income rise can counteract price surge, it also can attain policy goal ensuring food security for urban low-income group. Since both price subsidy and income subsidy can attain policy goal, policy-maker should optimize their decision-making—to seek a policy with lower cost to attain goal. In addition, the funds of food security come from public finance capital, it belongs to secondary allocation, and both efficiency and benefit of income distribution of public funds are all concerned, and all these are important basis to make decision for policy-maker. This paper will discuss the desired policy option is price subsidy or income subsidy, for the urban low-incomer to counteract price surge, from the view of policy cost, subsidy funds’ efficiency and income distribution effect. The contents including:Content1:Policy cost of price subsidy and income subsidyPrice subsidy means government recover grain price to initial level or below equilibrium through payment transfer to ensure food security for targeted people. Price subsidy can not rule out non-targeted people, actually it subsidies all urban residents, but the aim to restrain grain price rise is to ensure purchasing power and food security for urban low-income group. The aim of policy has been changed when price subsidy is implemented, and the policy cost will be pushed up by enormous non-targeted people. Policy simulation found that grain price increases20%if we use price subsidy to recover grain price to initial level, the policy cost is41.73billion yuan, no matter the targeted-people is low-income group, the lowest-income group or the poor. Income subsidy means government issues cash or cash coupon to targeted people directly through payment transfer to attain established food security policy goal after grain price increases. According to subsidy standard, income subsidy can be divided into Hicks subsidy and Slutsky subsidy. Empirical analysis found, if grain price increases20%, the policy cost of Hicks subsidy will decrease from7.356billion yuan to3.572billion yuan and1.722billion yuan, the policy cost of Slutsky subsidy will decrease from7.829billion yuan to3.748billion yuan and1.797billion yuan while the targeted people are narrowed from low-income group to the lowest-income group or the poor. The empirical analysis indicated that compared with price subsidy, income subsidy had obvious cost advantage, and the advantage will be more distinct as subsidy group is narrowed. As for income subsidy, although per capital subsidy cost of Slutsky is slightly higher than Hicks subsidy, still Hicks subsidy has obvious cost advantage after it is enlarged by numerous targeted people, and the advantage will be intensified with the width of targeted group.Content2:Funds’efficiency of price subsidy and income subsidyThe efficiency of food security funds means the rate of subsidy funds in grain consumption for targeted people. The aim of implementing subsidy policy is to ensure food security for targeted people, but price subsidy cannot exclude non-targeted people, some subsidy funds are used to compensate grain consumption for non-targeted people, the deviation of targeted people in price subsidy will lower the efficiency of subsidy funds. When grain price increases and non-grain price fixes, the relative price of grain to non-grain will increase, the rational consumer will reduce grain consumption and increase non-grain consumption, consumer will distribute their subsidy funds between grain and non-grain on the base of maximizing utility, even if they get enough income subsidy, this means even all the funds of income subsidy are given to targeted people, some of the funds are still used for non-grain consumption. The deviation of subsidy objects in income subsidy will decrease the efficiency of its funds. No matter the funds used for grain consumption by non-targeted people in price subsidy or for non-grain consumption by targeted-people in income subsidy, both of them make policy goal deviated and belong to leakage of food security for urban low-income group, and the funds’efficiency will decrease with leakage rate increasing. Policy simulation indicated that if grain price increases20%, the funds’efficiency will decrease from18.76%to8.98%or4.31%in price subsidy with targeted-people narrowed from low-income group to the lowest-income group or the poor. As for the efficiency of income subsidy funds, Hicks subsidy is higher than Slutsky subsidy about4points, no matter the targeted-people is low-income group or the lowest-income group and the poor. With the targeted-people in food security narrowed from low-income group to the lowest-income group or the poor, the funds’efficiency of Hicks subsidy and Slutsky subsidy will rise from67.77%to75.20%and78.15%, or from63.72%to71.69%and74.92%in turn.Content3:Income distribution effect of price subsidy and income subsidySubsidy is allowance that the government of a country or region gives supplement to those who suffer and their income deteriorates out of non subjective reason, it is an economic category that government finance transfer income to the micro-economic subject for free. As a form of national income redistribution, subsidy is concerned about its effect on improving income distribution and reducing income inequality. Price subsidy gives supplement according to consumption, how much each group can get is positively correlated with their consumption. Since grain is necessity for daily life, its consumption has a character with rigidity, grain expenditure gap is smaller than income gap among different urban groups by income-level. So, although the higher income group can get more from price subsidy, the subsidy gap is smaller than income gap among different urban groups, it means price subsidy will narrow income gap. Income subsidy will improve income of targeted people, and will not change income of non-targeted people, therefore, income policy for urban low-income group’s food security can reduce income gap among different urban groups by income-level. Supplement that targeted people get from Hicks subsidy is slightly less than Slutsky subsidy, so its effect to improve income distribution will be also slightly worse than Slutsky subsidy. Since the difference in supplement is very small between them, the differentiation in improving income distribution will not so obvious. With better target effect, the income distribution effect of income subsidy will better than price subsidy if the policy cost is the same. The empirical result showed, without food security policy the Gini coefficient of disposable income is0.3169among urban different income groups, and it will reduce to0.3161after implementing price subsidy no matter the targeted people is urban low-income group, the lowest-income group or the poor. The Gini coefficient will reduce to0.3162,0.3166and0.3167after implementing income subsidy when the targeted people is low-income group, the lowest-income group or the poor. The Gini coefficient is0.3169after price subsidy, higher than0.3162after income subsidy, when the subsidy fund is equal to Slutsky subsidy for the urban low-income.In conclusion, this study suggests that it is necessary to support urban low income group when grain price rises and the lower should have priority in getting subsidy, it means the priority sequence is the poor, the lowest-income group and then the low-income group. Compared with price subsidy, income subsidy has significant advantage no matter in policy cost or in funds’ efficiency, and although both price subsidy and income subsidy can shorten income gap among urban different income groups, but the income distribution effect of income subsidy is better when subsidy fund is the same. Therefore, income subsidy is a preferable option to help urban low-income group against price rise for their food security. As for income subsidy, Hicks subsidy is better than Slutsky subsidy.