Food Subsidies and Poverty Alleviation

The issue of targeting food subsidies to achieve the maximum effect on poverty has great practical and policy significance. The problem of the optimal pattern of food subsidies is formulated within the framework of the modern public finance literature. Taking explicit account of the budget constraint and of preferences and technology, a set of rules is derived for reallocating subsidies in a manner that would reduce poverty. A key assumption is that it is not possible to identify, costlessly, households below the poverty line. It is for this reason that generalized subsidies on commodities consumed by both the rich and poor are an attractive option. Considered are infra-marginal and marginal subsidies. Rules are derived for where ration shops should be located, what information should guide the targeting of subsidies to different regions, which commodities should attract the highest subsidy, and weighing the conflicting effects on consumer and producer poverty.