Targeted Benefits Flashcards
targeted benefits
goods or services or vouchers
cash benefits
income
consumer theory
what effect do TBs have on spending?
distorted consumers
F1 < B
consumers who’s decisions will be affected by food stamps relative to cash
food stamps distort their spending decisions away from what they would have chosen
need a higher level of TB to achieve same utility as cash
infra-marginal consumer
effect of food stamps is the same as cash (spending food stamps on food frees up income to spend on non-food)
equivalent variation
how much less in cash would someone need to be given to get same utility as with food stamps
Y+B - Y+B’
EV implications for consumer welfare
consumers will always prefer cash bc it gives them choice
effect of black market (reduces welfare cost)
to what extent to TBs reduce spending on bads or increase spending on goods
depends on balance of distorted/infra-marginal which depends on
- size of benefits (larger benefits - more likely to be distorted)
- degree of targeting
- consumer preferences
compensating variation
comparing utilities
how much extra in FS would someone need to give them same utility as with cash
Y+B’ - Y+B
implications for social welfare
recipients of TB are worse off admin costs externalities internalises TB must have other net benefits
rationality assumption in standard model
full info of what’s available
known preferences and budget constraint
chooses best option available
behavioural economics
relaxes standard model assumptions
nudge economics
subtly changing people’s decisions through
signalling, salience and mental accounting
signalling
consumers dont have full info
labels may have signals about how to spend money e.g. Winter Fuel Payment - didn’t actually have to spend it on heating
salience
consumers easily distracted - labels can draw attention
