SUMAYA HOQUE

1. Explain the rationale of voting or not voting in favor of a proposal to increase the
output of a public good.

Elections are used to make formal public decisions, and each person is usually allowed one vote.
People are assumed to vote in favor of a proposal only if they will be better off as a result of its
passage. A rational person’s most-preferred political outcome is the quantity of the government-
supplied good corresponding to the point at which the person’s tax share is exactly equal to the
marginal benefit of the good.

The most-preferred political outcome for the person whose marginal benefit curve and tax share
are illustrated in this figure is Q* units of the good per year. The voter achieves maximum net
satisfaction at point Z. This is the point at which Mb i= ti. The voter’s most-preferred political
outcome corresponding to this point is Q* units of the public good per year. Increments in output
of the good up to Q* per year make this voter better off because the extra benefit of those units
exceeds the extra taxes the voter must pay to make those units available. A voter will vote in
favor of any quantity of a public good as long as the marginal benefit of that quantity is not less
than the marginal tax, he or she must pay to finance that amount.
2. Compare and contrast between cash transfer and in-kind transfer. Discuss the
impacts transfer payments to the poor on work incentives.
SUMAYA HOQUE

Welfare assistance falls into two broad categories of aid: cash transfer programs and in-kind
transfer programs. In the case of cash transfer, eligible households are provided with additional
money income which they can spend in any way they choose. In contrast, in-kind transfers
provide specific quantities of real goods and services to welfare recipients, thereby restricting
their expenditure pattern to one at least implicitly endorsed by welfare donors. The rationale for
many in-kind benefits to the poor is that they allow some control over the spending patterns of
recipients., in-kind benefits free up cash that would have been spent on the subsidized items.
This cash then can be spent on nonsubsidized items. In other words, in-kind subsidies, like cash
subsidies, allow increased purchases of all goods.
Discuss the impacts transfer payments to the poor on work incentives.
Welfare benefits in cash or in kind assure the recipient of a minimum level of real income
independent of work. The more generous the grant, the greater is the disincentive to work. In
other words, a transfer results in an income effect that is unfavorable to work.

The indifference curves drawn illustrate a person’s preference for leisure or income. Leisure per
day is plotted on the horizontal axis. The maximum hours of leisure that a person can enjoy per
SUMAYA HOQUE

day is 24. Leisure is defined as engaging in any activity other than work for pay. If leisure is a
normal good, an increase in income caused by a transfer increases leisure hours per day. The
income effect of the transfer therefore is unfavorable to work. A transfer of BG dollars per day
will reduce hours worked per day to zero for the person whose indifference curves are illustrated.

Another work disincentive effect results from the way in which benefits are reduced as the
recipient earns more income.

Given the wage rate that a person can earn, the amount of the transfer for which the person is
eligible varies with hours worked per day (or any other time period). Transfer income per day
declines as the recipient’s earned income per day increases. At point C, the subsidy per day
would be zero. The subsidy reduces the net wage if the person takes more than L* hours of
leisure per day. This transfer reduces the incentive to work because it generates both income and
substitution effects unfavorable to work.
SUMAYA HOQUE

3. Take three countries as example that spend huge amount of their annual budget on
transfer payments. Do you observe any similarities in terms of priorities among them?

Figure 1 shows the transfer payment of Denmark, Ireland and Norway from 2002 to 2019
(Functional Expenditure of IMF). Comparatively, these three countries are the top three country
on spending for transfer payment.

Figure 1: Transfer Payments 2000-2019 (IMF Functional Expenditure)

Transfer Payments 2000-2019

20.00
18.00
16.00
Transfer Payments (GDP%)

14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Denmark Ireland Norway

Aging represents a significant challenge for public finances in all European countries. That’s
why these three countries focused on government transfer payments specially in giving pension.
Norway’s pension system is fairly well-positioned to sustain an aging population. Since pensions
in Norway are fairly generous, the burden on public finance remains high. In Denmark, recent
pension-system reforms have improved sustainability. In Ireland the pension system is currently
healthy but faces future sustainability problems in the absence of additional reforms.