Lectures in Microeconomics-Charles W. Upton How Economists Destroy Christmas

An Application to Food Stamps F $ 0$200 $400 A consumer with $400 weekly income spends $200 on food and $200 on other goods

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

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

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

How Economists Destroy Christmas Food Stamps F $ 0$200 $400 If he spends < $250 on other goods he gets an additional $150 in funds This segment is in green

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

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

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

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

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

How Economists Destroy Christmas 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 Christmas 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 Christmas Gifts in cash versus gifts in kind If you give people money, they can make free substitutions.

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.

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

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”

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 Christmas Generalization The argument goes beyond government programs.

How Economists Destroy Christmas Generalization The argument goes beyond government programs. Suppose you spend part of your income on apples.

How Economists Destroy Christmas Generalization The argument goes beyond government programs. Suppose you spend part of your income on apples. Right now, you consume A o apples X A AoAo I1I1

How Economists Destroy Christmas Generalization Suppose your uncle Ed gives you 10 apples as a Christmas Present. X A AoAo I1I1

How Economists Destroy Christmas Generalization Suppose your Uncle Ed gives you 10 apples as a present He makes you better off, moving you to a higher indifference curve. X A AoAo A o +10 I1I1 I2I2 I2I2

How Economists Destroy Christmas Generalization Suppose your Uncle Ed gives you 10 apples as a present He makes you better off, moving you to a higher indifference curve. But he could have done more by simply giving you the money X A AoAo A o +10 I1I1 I2I2 I2I2

How Economists Destroy Christmas Generalization Suppose your Uncle Ed gives you 10 apples as a present He makes you better off, moving you to a higher indifference curve. But he could have done more by simply giving you the money X A AoAo A o +10 I1I1 I2I2 I2I2 Moral: never give Christmas Presents. Give cash. Write a check.

How Economists Destroy Christmas What does this mean? Normative Economics

How Economists Destroy Christmas 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 Christmas What does this mean? Normative Economics Positive Economics

How Economists Destroy Christmas What does this mean? Normative Economics Positive Economics –People will not give gifts in kind

How Economists Destroy Christmas 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