If the substitution effect is zero, then an individual will be indifferent between a subsidy on each unit consumed of some good and a lump- sum cash subsidy that costs the government an equal amount of money.

Question

Quizplus · Accepted Answer

If the substitution effect is zero, it means that the individual's consumption pattern does not change in response to changes in price. Therefore, the individual will be indifferent between a subsidy on each unit consumed and a lump-sum cash subsidy. The cost to the government is also the same in both cases, so the individual would not have a preference either way.

If the Substitution Effect Is Zero, Then an Individual Will