lecture15_Oct26 - InKind Transfers Economic theory of...

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October 24, 2011 In-Kind Transfers
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Economic theory of in-kind transfers (assuming food stamps cannot be sold for cash) $200 Cash Transfer $200 Food-Stamp benefit All Other  Goods Food $200 $800 $200 Foodie $400 A $600 $800 $400 $600 $0 B All Other  Goods Food $200 $800 $200 Foodie $400 A $600 $800 $400 $600 $0 B Foodie: Spends a lot on food items With Cash transfer spends $400 on food and $300 on other items With Food stamps, no change in his spending decision, still purchases $400 of food
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Food $200 Cash Transfer $200 Food-Stamp benefit All Other  Goods Food $200 $800 $200 Techie $400 A $600 $800 $400 $600 $0 B All Other  Goods $200 $800 $200 Techie $400 A $600 $800 $400 $600 $0 B C Economic theory of in-kind transfers (assuming food stamps cannot be sold for cash) Techie: Spends very little on food With Cash transfer spends $130 on food and $570 on other items With Food stamps, this option is not available to him so purchases more food (exactly $200 worth) BUT – he is worse off than if he had the money as cash because we restrict his choices!
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Selling food stamps § Food stamps cannot legally be bought or sold, but  there is a black market for them § The techie wants to spend less on food so would be  willing to sell food stamps for $0.75 for each $1 of food  stamps § Others who are paying $1 of cash for $1 of food would be  willing to buy food stamps at this price to get the same $1  of food for $0.75. § What does this do to the budget constraint?
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Food $200 of Food Stamps can sell for $0.75 for $1 of FS All Other  Goods $200 $800 $200 Techie $400 $600 $800 $400 $600 $0 C Economic theory of in-kind transfers (Selling food stamps) Selling food stamps: better off than if he couldn’t sell, but worse off than if he’d received  the $200 in cash rather than having to sell food stamps at a discount Largely undermines initial goal of program to get individual to buy more food (Note: Foodie wouldn’t sell food stamps … why?) Food $200 of Food Stamps Cannot sell All Other  Goods $200 $800 $200 Techie $400 $600 $800 $400 $600 $0 C D B
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