Purpose of this problem set: get yourself familiar with i) the economists’ interpretation of individual welfare and the assumptions embedded there, ii) the Pareto principle and Pareto efficiency, and iii) the normative aspects of market systems (we have not discussed these aspects yet); the main materials related to this problem set are covered in the weeks 3 and 4.
1. In Question 1 of PS 1, you worked the details of the two policies that intended to help individuals in need. In particular, you presented reasons suggesting that cash transfers are always “at least as good” for their recipients as in-kind transfers, and are sometimes better.
a. Explain how your reasoning and suggestion presented in Question 1 of PS 1 are based on the economist’s interpretation of a consumer’s welfare as preference satisfaction, and the underlying assumptions there.
b. However, government policies often involve in-kind transfers: this is the case for food, housing, education, legal services, health care, and many other goods, and in-kind transfers are often much more popular than cash transfers. Can you think of possible reasons that the government chooses in-kind rather than cash transfers in such cases? Make sure that you spell out your assumptions in the process of presenting your answers.