4. Income redistribution (2016)

Apunte Inglés
Universidad Universidad Autónoma de Barcelona (UAB)
Grado Economía - 3º curso
Asignatura Public Sector Economics
Año del apunte 2016
Páginas 6
Fecha de subida 14/03/2016
Descargas 10
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Chapter 4. Income Redistribution. Public sector economics.

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4. INCOME REDISTRIBUTION Designing Redistributive Policy Cash versus in-kind transfers (check, voucher1) - “Food stamps”: - “Housing subsidies”.
Cash Transfers: incentive effects.
Poor guy - max U=U( F , A ) food, other s.t. Pf· F + Pa· A = M ( + T) Assumption: a positive income-elasticity of both F + A (bot goods are “normal”).
To prevent the guy spend his check in “wine and women”, the government gives him a voucher, a basket with cheese at the same value that the check.
max U=U(F , A) s.t. {Pf· F + Pa· A = M} U {F} With the voucher, individual will be able to achieve point 1, as in the check, and will be better of than in the point O’, that the initial chosen point plus the amount of food.
So the effect of both are the same.
Claim: for this structure of preferences, a cash transfer and an in-kind transfer are behaviorally equivalent.
1 Vale, cupón.
With other preferences, it matters the part of the budget constraint that it’s not available with the voucher. With this, if exists a secondary market (black) where you can change your basket of food for cash (with a little lost), you will be achieving point 4. or a point belong the purple upper segment.
So, the best is to give him the cash so he can choose how he wants to spend it. But society is not happy with this individual spending his money in wine and women and letting his poor children starving.
This is call specific egalitarianism.
To finance an in-kind transfer, the government need a lot of officers. This has a huge cost, and the are less money to the vouchers.
Housing subsidies - Heterogeneity.
- Durability.
- Spatial fixity.
This characteristics make the housing commodities very different from others.
max U=U (HS , A) => Housing Services.
s.t. R + Pa· A = M (+ T) => Rent=PHS· HS In-kind transfers related to housing: - Supply-based (“public housing”).
- Demand oriented.
The questions are: “Will I take the public housing?” and “Will I consume more HS?” (because the offered flat could be worse than the previous one, so will offer less services). The more favorable case is when both are yes. Because the government will offer me a fixed amount of HS at a price, so they also determined my other goods consumption.
Will this scheme be efficient? It depends. Given the utility level of tax-payers, will I be better of if this subsidy will be given to me in a different way (cash)? If the answer is yes, the scheme is not efficient. Or, given the utility level of poor people, if tax-payers could be better of paying less with an alternative design, it’s not efficient.
Public housing is usually not efficient, as if you receive the same amount of help in a cash transfer, you’ll be better off.
Demand oriented (“housing allowances”) HUD (Housing and Urban Development): Experimental Housing Allowance Program. Instead of participate in the construction of new houses, it is based in the demand.
- Housing gap scheme: Consider C the cost of a decent house, M your income and b the percentage of income you can expend on a house. So C-bM is your housing gap, and it will be equal to the subsidy you will receive, in cash, but not a cash transfer, because it depends in the amount of money society thinks you have to spend in your house. For this reason, it is an in-kind transfer. Your new budget constraint will be: PHS· HS + PA· A = M + (C - bM) => R + PA· A = C + (1-b)M R S If no further requirement are imposed, this will be equivalent to a cash transfer.
Imposing a physical requirement (have 3 rooms, have air conditioner, etc), the government try to avoid you think the transfer is only cash.
There can be also a requirement of minimum rent (R>^R). The physical requirements are very expensive, because de government has to high a lot of officers to go and see the houses to see if they achieve the minimum. This requirement is easier to control, because you only have to observe the rent that this people are paying, and they have to be superior than un amount fixed by the government.
But also with requirements, it could not work, because you’re affecting the income elasticity.
But, normally, it is efficient.
Without requierements With requirements.
- Percent of rent scheme: This doesn’t work as a cash transfer, because you modified the relative Housing Services price, so you affect the price elasticity.
Will this one be efficient? No, because if you give the individual a cash transfer, the individual will choose another point, where he’ll be better of, without any change in the amount paid by tax payers.
The EHAP try to answer 3 questions: What will be the demand responses? What will be the market responses? And another administrative details not funny.
To the first questions, if the demand will be better than with the supply-based, the answer is yes.
With the same amount payed by tax-payers, the poor individuals will be better of.
To the second one, which is very important, you have to see how is the supply. If it is inelastic, there will be no change in the HS, but the price will increase. If it is elastic, you’ll be an increase in the HS and a discrete increase in the price. The empirical evidence show that the market can accommodate the increases of the demand without huge changes in prices. This is because the poor individual demand is only a part of the total aggregate demand. Also, because moving cost are an important part, so poor individual will move gradually.
Cash transfers (Welfare) - Cost associated with the welfare System.
– Administrative cost (10%).
– Deadweight loss (substitution effects, the utility paid by the tax payers will be less than the gain of tax receivers).
– Moral hazard on poor individuals: If the government protects you against been a poor individual you want do all you can, you’ll have strong incentives to work less, for example.
c (consumption) L (leisure) H (time endowment) L=H-l max U(c,L) s.t. p· c = w(H-L) (p=1) U=u(c,L)=u(c,H-l)=V(c,l) If the income increases thanks to the government transfers, we have to effects: - Income effect: the real income will increase and, as consumption and leisure are normal goods, the demand for leisure will increase, leading to a reduction in the labor supply.
- Substitution effect: c + w· l = w· H => the price of leisure will decrease, leading to a reduction in the demand of leisure, so the labor supply will increase.
w(1- τ) Economic theory is not clear about what happened, so we have to see empirical evidence. It says that the primary earner of the family (usually the father) has an inelastic labor supply but the second earner (usually the mother)have more elastic labor demand.
- Intensive margin: The case where you work before the tax and work also after the it. You only choose the amount, more or less, but work in any case.
- Extensive margin (participation decision): The case when you prefer not to work before the tax and you prefer to work after it, or the opposite.
This cases can happen when you can not decide to work X hours. You have to choose to work, for example, in a part time job (4h) and 0h.
- Some institutional designs.
- Everyone is given an amount of income provided that their income is below a threshold (umbral): We see that you’ll never choose any point where you have to work more and receive the same income as if you work less to be able to receive the transfer.
– AFDC (Aid to families with dependent children): With a different design, it changes. The government gives a transfer with an amount of B if E=0. In other case, your transfer will be B-E for E>0 (dB/dE=-1).
– Negative Income Tax: B=B if E=0. B=BτE) if E>0. dB/dE=-τ=-0,5 f.e.
Ebreak-even so that B=0 B= τEb-ev Ebr=B/τ With the tax, you’re richer, so you’ll consume more normal goods (leisure), reducing your labor supply. Also, with the substitution effect, leisure is cheaper (w(1τ)), reducing also your labor supply.
Governments want to encourage labor supply, to have redistributive effects and to keep cost low, but the three of them will be no achieved at the same time, f.e., when you give cash transfers (redistribution), you will be probably reducing labor supply.
–Wage subsidies (Earned Income Tax Credit): You are trying to make work more attractive for individual with poor income.
Okun–> “A leaky bucket”: The amount of money tax payers put into the bucket is actually, as a consequence of the substitution effect, less than the cost they are experiencing.