Distributional Consequences of Rural Food Levy and Subsidized Urban Rations

In many developing economies, governments provide limited quantities of subsidized food rations to their urban population. This paper presents a positive analysis of the impact of such subsidy systems on the welfare of heterogeneous individuals within the urban and rural sectors, when the urban subsidy is funded through a levy on farmers. Though such an intervention has the appearance of a transfer from the rural to the urban sector, we characterize the conditions under which the opposite happens; that is, certain groups in the rural sector become better-off due to the intervention, while some of those in the urban sector become worse-off. Moreover, the rich turn out to be among the gainers while the poor are among the losers from the intervention. Such counter-intuitive outcomes arise not only because of the general equilibrium effects of the intervention, but also because a procurement cum rationing system entails particular types of price discrimination among individuals. In addition, we identify systematic patterns between the groups which gain versus those who lose from the intervention