Interactive tool
Ten houses: subsidy vs. supply simulator
Give every buyer $100,000 when there are still only ten houses. Where does the money end up?
Imagine ten houses and ten buyers who can each afford $500,000. Now the government gives every buyer another $100,000. That’s great — unless there are still only ten houses. The buyers are richer on paper, but they are bidding against each other for exactly the same supply. Try it:
What the simulator shows
Economists call the question “incidence”: who ends up with the benefit of a subsidy, regardless of whose name is on the check. The answer depends on how easily supply can respond.
- When supply can’t respond (no new permits, no land, long construction times), a subsidy to buyers mostly becomes a higher price. The buyer receives the check; the seller receives the money.
- When supply can respond, higher prices call forth new homes, and more of the subsidy stays with buyers as extra housing.
- Expanding supply directly pushes prices down without a public check, but it helps any particular family more slowly — which is why the two approaches are often combined.
Where this shows up in real life
The same mechanism appears wherever purchasing power grows faster than the thing being purchased: housing assistance in markets where construction is constrained, student aid when college capacity doesn’t expand, childcare subsidies where licensed slots can’t grow quickly, and healthcare subsidies in markets with few providers. The research on each is mixed and specific; read the full explainer: What happens when government subsidizes demand but restricts supply?
The Zesht principle: never analyze a subsidy without analyzing supply. Otherwise we see the check, but miss where the money ultimately goes.
About the model
This is a deliberately simple teaching model: a local market with constant price sensitivities. The share of a subsidy captured by sellers equals the buyers’ price sensitivity divided by the sum of buyers’ and builders’ price sensitivities. Real markets have credit constraints, many submarkets and long lags. The numbers are illustrative; the direction of the effect is the lesson.