Transfer Payments and Direct Provision

Question 1

Transfer Payments

Answer 1

a welfare payment made that is not linked to economic output

Question 2

Examples of Transfer Payments

Answer 2

• Unemployment benefits.
• Housing benefits.
• State pensions.
• Disability benefits.
• Donations to charity.
• Pocket money.

Question 3

Purpose of Transfer Payments

Answer 3

• Helps those people most in need.
• To improve the standard of living.
• Redistribution of income.

Question 4

Are Transfer Payments a part of GDP?

Answer 4

No

Question 5

Advantages of Transfer Payments

Answer 5

• Targets people most in need of help by providing a minimum level of income.
• This leads to an increasing in living standards of recipients, which helps to reduce inequality and lower the levels of poverty.

Question 6

Disadvantages of Transfer Payments

Answer 6

• Costly to the government.
• Opportunity cost to the government.
• Expensive to administer (payments are looked into before they are made).
• Disincentive effects (some people may choose to remain on benefits instead of seeking employment).
• Unproductive (money is being taken out of the productive part of the economy (employed workers) and given to unproductive parts of the economy (unemployed people).

Question 7

Direct Provision

Answer 7

government provision of merit goods and public goods.

Question 8

Examples of Direct Provision

Answer 8

• Public goods, such as street lighting, road signs, information.
• Merit goods, such as education, healthcare.

Question 9

Purpose of Direct Provision

Answer 9

• To overcome the free-rider problem associated with the provision of public goods.
• To overcome the problem of under-provision and under-consumption associated with merit goods.

Question 10

How direct Provision Affects Demand Supply Curve

Answer 10

• Government supplies quantity a to the market for free (price = 0).
• At price = 0, quantity demanded (b) is more than the quantity supplied, resulting in excess demand (distance a to b).
• Queueing and rationing are likely to occur.

Question 11

Advantages of Direct Provision

Answer 11

• More consumption of public goods and merit goods.
• The free-rider problem of public goods is overcome.
• The problem of under-production and under-consumption of merit goods is reduced.
• Higher standard of living (especially for poorer consumers).

Question 12

Disadvantages of Direct Provision

Answer 12

• Expensive.
• Opportunity costs.
• Excess demand, which leads to rationing and queuing.
• Lack of profit motive by the government may reduce efficiency and lower quality.