The traditional argument for in-kind transfers rests on their ability to induce
greater consumption of externality-causing commodities. This paper shows that
this effect will be diminished the greater the possibilities for substitution in
household production. The argument rests on the distinction between market
goods which can be subsidized and the commodities donors value which are
produced in the household. If the price of the market good is reduced
through a subsidy, consumers will react in part by producing the commodity
with an altered ratio of inputs.
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