Variable Versus Fixed Rate Subsidies: Are the Latter Necessarily Less Efficient?

Abstract

In a recent article in this journal, Stutzer (1984) investigated the relative in-efficiencies of fixed versus variable rate subsidies as they pertain to analyzing different forms of revenue sharing. His analysis butlds on the theoretical presumption that a variable rate subsidy is generally less inefficient than a fixed rate subsidy of equal size. In this article it is shown that if the good being subsidized is a public good, it is possible that a fixed rate subsidy will be more efficient than a variable rate subsidy from a benefit-cost analysis perspective, once collective decision-making aspects are incorporated into the analysis. This indicates the importance of incorporating the presence of public goods, when appropriate, into an efficiency analysis to see whether traditional results are still valid.