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2.

2 Putting the Tools to Work: TANF and Labor


Supply Among Single Mothers . . . . . . . . . . . . . . . . . . . . . . . 37
Identifying the Budget Constraint 38
The Effect of TANF on the Budget Constraint 39

2.3 Equilibrium and Social Welfare . . . . . . . . . . . . . . . . . . . 43


Demand Curves 44
Supply Curves 46
Equilibrium 48
Social Efficiency 49
Competitive Equilibrium Maximizes Social Efficiency 50
From Social Efficiency to Social Welfare: The Role of Equity 52
Choosing an Equity Criterion 54

2.4 Welfare Implications of Benefit Reductions:


The TANF Example Continued . . . . . . . . . . . . . . . . . . . . . . . 55

2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

APPENDIX TO CHAPTER 2 The Mathematics of Utility Maximization . . 60

CHAPTER 3 Empirical Tools of Public Finance . . . . . . . . . . . 63


3.1 The Important Distinction Between
Correlation and Causality . . . . . . . . . . . . . . . . . . . . . . . . . 64
The Problem 65

3.2 Measuring Causation with Data Wed Like to Have:


Randomized Trials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Randomized Trials as a Solution 67
The Problem of Bias 67
Randomized Trials of ERT 69
Randomized Trials in the TANF Context 69
Why We Need to Go Beyond Randomized Trials 70

3.3 Estimating Causation with Data We Actually Get:


Observational Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Time Series Analysis 72
Cross-Sectional Regression Analysis 75
Quasi-Experiments 80
Structural Modeling 83

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