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Abstract

The Indian government procures rice from wholesalers or producers at a price below the market price and then distributes it to low-income consumers at a subsidized price. This paper uses a simulataneous equations econometric model to evaluate the effects of this policy on supply/demand of rice in the state of Tamil Nadu, between 1956 and 1985. Results show that production is more responsive to power for irrigation and fertilizer prices than to output prices. Because supply is inelastic, producers bear the burden of the 'tax' imposed by procurement even though rice is procured from the wholesaler. Rice distributed by the government displaces rice demanded in the open market, and thus the government distribution of rice has not increased the total consumption of rice.

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