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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