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Question: One common argument against public assistance taking the form of direct cash handouts is that the recipients will use the money to buy things that taxpayers find objectionable, e.g., illicit drugs, gambling, etc. To avoid this outcome, the argument goes, public assistance should take the form of in-kind transfers, e.g., food, housing, medical care, etc. What does this argument assume about the income elasticities of objectionable goods? Suppose the recipients could costlessly resell the in-kind transfers. In this case, is there any difference between direct cash handouts and in-kind transfers?
READER COMMENTS
John Hall
Jun 12 2025 at 9:29am
We can calculate elasticity discretely, assuming initial income I, fixed prices P (of objectionable goods), initial Quantity Q (of objectionable goods), and change in income from cash transfers x (and assuming all money from the transfer goes to objectionable goods), as
e_d = (2 * I + x) / (2 * Q * P + x)
So the elasticity depends on how much income they have, how much they are initially spending on objectionable goods, and how large the transfer is relative to initial income). The elasticity of demand will always be greater than 1 (or equal to 1 if QP=I), meaning that the objectionable goods are assumed to be superior/luxury goods. The larger the initial amount of money spent on objectionable goods (QP/I), the lower the elasticity of demand.
If they can costlessly resell in-kind transfers, then I don’t think there should be any difference from the case with cash handouts. They’ll keep the in-kind goods if they want to keep and sell if they want to sell. Not all goods and services can be costlessly resold, however.
Bryan Cutsinger
Jun 12 2025 at 7:15pm
John,
I’m not following why we know that the income elasticity of demand for objectionable goods is greater than or equal to 1. Can you elaborate?
At a more fundamental level, what does people’s preference for in-kind benefits imply about their view of the income elasticity of objectionable goods?
Best,
Bryan
Knut P. Heen
Jun 17 2025 at 11:24am
The assumption behind in-kind transfers is that the goods will not be resold for some reason. One reason is that there is no market for the good because it is free for everyone (like public libraries, public schools, public medical care in some countries). Another reason is that the good has to be resold at a rather large discount (like soup from a soup kitchen for the poor). A third reason is that the good cannot be resold because it is the property of the municipality (public housing).
If you hand out free lap tops, these will probably be resold to buy objectionable goods. Unless the clients have become so much richer by receiving the lap top that they reduce their demand for the objectionable goods (which is not likely). This is the reason in-kind transfers generally take the form of goods which cannot be resold.
Moreover, the point of the welfare system is not to maximize the utility of the welfare client. The point is to bring the client up to an acceptable level from the perspective of the supporters of the welfare system. The Nanny state maximizes the utility of the nanny.
Bryan Cutsinger
Jun 17 2025 at 7:47pm
I agree with most of the points you raise here. But suppose the in-kind transfers are things that cannot be resold. Is it the case that these in-kind gifts won’t affect the recipient’s demand for objectionable goods?
Bryan
nobody.really
Jun 17 2025 at 5:42pm
Knut P. Heen makes all the relevant points that spring to my mind. But to answer the questions directly:
I surmise the argument reflects an assumption that recipients would not be able to costlessly resell the in-kind transfers. Under that assumption, making transfers in-kind would tend to increase the consumption of the in-kind goods/services, and decrease the consumption of all other goods/services (including objectionable ones), relative to a world in which the transfers were made in cash. This strikes me as the most salilent assumption when judging the relative merits of in-kind vs. cash transfers.
No. This conclusion reflects no policy or economics insight on my part; instead, it reflects my understanding that the phrase “could costlessly resell” effectively means “cash” for purposes of this exercise. Maybe I’m missing something here. If I make the assumption that there is no functional distinction between in-kind goods/services and cash, then I would see no point to designing a policy based on that distinction (which leads me to suspect that people who make these policies do not think that recipients can costlessly resell the in-kind goods/services). And that conclusion does not change regardless of the recipient’s income elasticity for objectionable goods.
Perhaps Bryan Cutsinger is asking us to analyze the beliefs that policy makers have about the income elasticities that recipients have for objectionable goods/services, provided that policy makers assume that 1) in-kind goods/services can be costlessly exchanged for cash and 2) policy makers will not tolerate any increase in the consumption of objectionable goods/services (regardless of how much the policy increases the consumption of in-kind goods/services). In answer, I say that recipients of transfers would become richer. Richer people tend to consume more of everything–potentially including more of the objectionable goods/services. To make this policy attractive to the policy makers under the assumptions stated above, they would need to assume that recipients would choose not to use their newfound increase in wealth to consume more of the objectionable goods/services–that is, the recipients would have a zero or negative income elasticity for objectionable goods/services.
Bryan Cutsinger
Jun 17 2025 at 7:44pm
Nicely done!
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