How Economists Destroy

Christmas

Lectures in Microeconomics-Charles W. Upton

An Application to Food Stamps
$ A consumer with
$400 $400 weekly
income spends
$200 on food and
$200
$200 on other
goods

F
0 $200 $400
How Economists Destroy
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An Application to Food Stamps
$ A consumer with
$400 $400shows
This graph weekly
income spends
the process of
$200
making thisonchoice
food and
$200
$200 on other
goods

F
0 $200 $400
How Economists Destroy
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 Food Stamps
$ He is offered the
$400 chance to buy
$300 of food
stamps for $150
$200

F
0 $200 $400
How Economists Destroy
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 Food Stamps
$ If he spends more
$400 than $250 on
other goods (less
than $150 on
$200
food) the new
budget line is the
old line; this
segmentF is in
0 $200 $400
green
How Economists Destroy
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 Food Stamps If he spends <
This segment
$ $250 on other
is in green goods he gets
$400
an additional
$150 in funds
$200

F
0 $200 $400
How Economists Destroy
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 More Utility The consumer
$ maximizes
$400 utility by
moving to a
higher
$200
indifference
curve

F
0 $200 $400
How Economists Destroy
Christmas
 The food
stamps have
made him More Utility The consumer
$
better off maximizes
$400 utility by
moving to a
higher
$200
indifference
curve

F
0 $200 $400
How Economists Destroy
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 Even More Utility
$ However, if the
$400 government had
just given him
$150, he would
$200
have been even
better off

F
0 $200 $400
How Economists Destroy
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 The relevant
Even More Utilitybudget line
would be the
$ However, if the
red line
$400 government had
just given him
$150, he would
$200
have been even
better off

F
0 $200 $400
How Economists Destroy
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 Even More Utility
$ And he could
$400 do even
better!
$200

F
0 $200 $400
How Economists Destroy
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 Why this Result
• The gift of food stamps came with strings.

How Economists Destroy

Christmas
 Why this Result
• The gift of food stamps came with strings.
• The consumer could not set MRS =MRT

How Economists Destroy

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 Why this Result
• The gift of food stamps came with strings.
• The consumer could not set MRS =MRT
• Economists refer to this as the gifts in cash
vs. gifts in kind argument.

How Economists Destroy

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 Gifts in cash versus gifts in kind
• If you give people money, they can make
free substitutions.

How Economists Destroy

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 Gifts in cash versus gifts in kind
• If you give people money, they can make
free substitutions.
• If you give them a restricted gift, MRS and
MRT may not be equal.

How Economists Destroy

Christmas
 Gifts in cash versus gifts in kind
• If you give people money, they can make
free substitutions.
• If you give them a restricted gift, MRS and
MRT may not be equal.
• In that case, people are not as well off as
they could be.

How Economists Destroy

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 Government Programs
• Many government programs are truly gifts
in kind.

How Economists Destroy

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 Government Programs
• Many government programs are truly gifts
in kind.
• A partial list would include
– Food stamps
– Housing Subsidies
– “Free Education”

How Economists Destroy

Christmas
 Government Programs
• Many government programs are truly gifts
in kind.
• A partial list would include
– Food stamps
– Housing Subsidies
– “Free Education”
• The gifts in cash vs. gifts in kind argument
implies all of these programs are inefficient.
How Economists Destroy
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 Generalization
• The argument goes
beyond government
programs.

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 Generalization
• The argument goes
beyond government
programs.
• Suppose you spend
part of your income on
apples.

How Economists Destroy

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 Generalization
X
• The argument goes
beyond government
programs.
• Suppose you spend
part of your income on
apples. I1
• Right now, you
consume Ao apples A
Ao
How Economists Destroy
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 Generalization
X
• Suppose your uncle
Ed gives you 10
apples as a Christmas
Present.

I1

A
Ao
How Economists Destroy
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 Generalization
X
• Suppose your Uncle
Ed gives you 10
apples as a present I2
• He makes you better
off, moving you to a I2
higher indifference I1
curve.
A
Ao Ao+10

How Economists Destroy

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 Generalization
X
• Suppose your Uncle
Ed gives you 10
apples as a present
I2
• He makes you better
off, moving you to a
higher indifference I2
curve. I1
• But he could have
done more by simply A
giving you the money Ao Ao+10

How Economists Destroy

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 Generalization
X
• Suppose your Uncle
Ed gives you 10
apples as Moral:
a present never give
I2
• He makes you better Presents.
Christmas
off, moving you to a
Give cash. Write a
higher indifference I2
curve. check. I1
• But he could have
done more by simply A
giving you the money Ao Ao+10

How Economists Destroy

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 What does this mean?
• Normative Economics

How Economists Destroy

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 What does this mean?
• Normative Economics
– We should not give food stamps, just cash
– Uncle Ed should give cash, not a gift in kind

How Economists Destroy

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 What does this mean?
• Normative Economics
• Positive Economics

How Economists Destroy

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 What does this mean?
• Normative Economics
• Positive Economics
– People will not give gifts in kind

How Economists Destroy

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 What does this mean?
• Normative Economics
• Positive Economics
– In fact there is compensation in kind

How Economists Destroy

Christmas
 What does this mean?
• Normative Economics
• Positive Economics
– In fact there is compensation in kind
• Employee benefits
• Christmas presents

How Economists Destroy

Christmas
 End

©2004 Charles
W. Upton

How Economists Destroy

Christmas