NPTEL-Economics-Public Economics
Module 2
Lecture 7
Topics
2.21 Implications of Cutting Welfare Benefit
2.21 IMPLICATIONS OF CUTTING WELFARE BENEFIT
Efficiency and equity considerations in introducing or cutting TANF benefits.
In a typical labor supply/labor demand framework, these changes shift the labor
supply curve for the welfare recipients.
Figure 7.1 illustrates this.
Figure 7.1
Benefits or costs to society of changing TANF
Apply tools of welfare analysis to determine the welfare implications of cutting
TANF benefits.
Lab supply is obtained from utility maximization. Labor demand is obtained from
profit maximization by firms opposite of the regular goods market.
Market for labor by low income people.
with no government intervention; Max social efficiency]
TANF Benefit
new equilibrium at B
Dead weight loss
=ABB’ Efficiency
TANF Benefit
new equilibrium at C
Deadweight loss = ACC’
1
Indian Institute Of Technology, Kanpur
NPTEL-Economics-Public Economics
At each point between B & A,
Must produce more & employ more labor.
Deadweight Loss = ABB’.
If we know the slopes of Labor Supply & Labor Demand then we can compute
the magnitude of the Deadweight Loss. Slopes can be estimated using data
determined by preferences & production function.
If efficiency is max at TANF benefit = 0, then why TANF?
The competitive equilibrium might be the social efficiency maximizing point but
may not be social - welfare maxing point.
Cutting TANF benefits would worsen out comes for the worst off in the society.
May have dramatic equity costs that offset efficiency gains.
What generally happens when TANF
– Total income in the economy will
– But the total utility is likely
– This is because we are adding only a small fraction of income to high income
individuals and taking away a large fraction of income from low income
individuals.
So the utility of the high income individual might only a little but utility of low income
might by a large margin.
Different policies involve different deadweight loss triangles, but also different
levels of redistribution for the poor.
SWF helps determine the right policy for society.
2
Indian Institute Of Technology, Kanpur