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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.