Public Finance (MPA405) Dr. Khurrum S. Mughal

Lecture 17: Government Subsidies and Income Support for the Poor Public Finance

Price Distorting Subsidies that Lowers the Price to Zero Medicaid – Largest program of assistance to Poor in USA Reduced the cost of medical services to “zero” Assuming annual quantity of medical care consumed can be measured by number of hospital visits Supplied by perfectly competitive industry MSC doesn’t increase when more is made available

Full Subsidization of Medical Services Medical Office Visits per Year 0 Q* E1E1 QGQG 25 = P* E2E2 MB L B A Price (Dollars per Month) Excess Burden

Implications Increase in Consumer Surplus Part of increase is already what would have been acquired anyway Excess burden is the due to subsidy in kind Medicaid recipients would be better off with cash subsidy

Additional Effects of Subsidies: The Case of Increasing Costs Medicaid not only costs taxpayers money to pay for the program, it also increases the amount they pay for medical services by increasing demand for those services.

The Impact of The Medicaid Program on Price: The Case of Increasing Cost Price (Dollars) Medical Office Visits per Year 0 QIQI O Q' E1E1 QLQL 140 Q2Q2 QGQG QOQO E2E2 100 S = MSC DODO D M = MSB DLDL D' M

Implications Increase in Prices of Medical Services Tax payers finance the program Tax payers face the higher medical service prices for themselves Overall decrease in real incomes of tax payers Losses in efficiency as well as changes in income distribution

Subsidizing Housing Providing an Apartment: This subsidy allocates a standard apartment to an eligible recipient. With this type of subsidy the recipient cannot supplement the subsidy with their cash. It is a “take it or leave it” option. Housing Vouchers: This subsidy allows the recipient a particular allotment of vouchers to rent housing but the recipient may supplement the subsidy with their cash. Cash: This subsidy is not restricted to spending on housing.

Public Housing Government constructed low cost housing for low income families Rented at well below market rates Public Housing are expected to increase recipient's housing consumption Might reduce housing consumption due to lack of freedom of choice Suppose Government offers housing at $30 per room where the rent for 3 bedroom apartment is 90 $ – The same goes for rent in the market for $300

Eligibility for Public Housing and the Effect on Housing Consumption Expenditure on Other Goods per Month (Dollars) Housing per Month (Number of Rooms Rented) = I M H 400= F J BA E1E1 U1U1 U2U2 U3U3 I'I' G E2E2