Page 476 - The Principle of Economics

486
PART SEVEN
ADVANCED TOPIC
(a) The Constraint Is Not Binding
Cash Transfer In-Kind Transfer
Food
$1,000
0
Food
$1,000
0
Figure 21-17
Food
$1,000
Nonfood 0 Consumption
(b) The Constraint Is Binding
Food
$1,000
Nonfood 0 Consumption
Nonfood Consumption
BC1
BC2 (with $1,000 cash)
B
I2
A
I1
BC1
BC2 (with $1,000 food stamps)
B
I2
A
I1
Cash Transfer
In-Kind Transfer
BC2 (with $1,000 cash)
BC1
A
I1
B
I2
BC1
BC2 (with $1,000 food stamps)
C
A
B
I II2 13
CASH VERSUS IN-KIND TRANSFERS.
in-kind transfer of food. In panel (a), the in-kind transfer does not impose a binding constraint, and the consumer ends up on the same indifference curve under the two policies. In panel (b), the in-kind transfer imposes a binding constraint, and the consumer ends up on a lower indifference curve with the in-kind transfer than with the cash transfer.
(perhaps by issuing him food stamps) or simply give him $1,000 in cash. What does the theory of consumer choice have to say about the comparison between these two policy options?
Figure 21-17 shows how the two options might work. If the government gives Paul cash, then the budget constraint shifts outward. He can divide the extra cash
Both panels compare a cash transfer and a similar
Nonfood Consumption