Question

Governments offer both cash assistance and in-kind benefits, which are payments that must be spent

on a particular good. Consider a budget constraint that trades off food spending against spending on

all other goods. The government is considering offering $100 of in-kind food assistance. Will

recipients be indifferent between receiving $100 cash or this in-kind benefit? Use indifference curve

analysis to show which individuals would be indifferent, and which would care about the form the

benefits take. For these people, which is better?

Answer 1

Consider a budget constraint $P_xx+P_yy\leq M$

where $P_xx$ is spending on food and $P_yy$ is spending on all other goods. And M is the total income.

If the government offers $100 in kind food assistance, this would increase M but this additional $100 can only be spent on food and no other goods.

Let the consumers' utility function be of the Cobb Douglas form. The indifference curves for Cobb Douglas utility functions are convex curves. Any increase in M would lead to an increase in the total consumption of the consumer and due to monotonic preferences, the consumer would move to a higher indifference curve, therefore, increasing his utility.

Now, if the consumer treats food and all other goods as perfect substitutes, an increase in M which can only be spent on food would not have any affect on the consumers' indifference curve. The consumer would be indifferent between using the additional M to purchase more food or using the additional M for purchasing more of other goods.

Answer 2

The government often use the policy of cash transfer or giving in kind as the means of redistribution. The cash payments can be given in the form if unemployment compensation or it could be given as the temporary aid to needy families. The government can also give in kind payments as food stamps or in the form of housing vouchers.