Question

Suppose that the government could know for sure each individual's earning capacity. This would allow government to:

A	eliminate moral hazard to welfare recipients

B	prevent high-wage earners from working less in response to taxation

C	eliminate the administrative costs associated with welfare programs

D	reduce the administrative costs associated with welfare programs

Answer 1

Option D is correct - reduce the administrative costs associated with welfare programs

When the government could know for sure each individual's earning capacity it will help the government to focus mainly on people living below the poverty line and poor people. When government does not know the true capacity of individual's earnings then they conduct welfare programs for everyone in the society even for the ones that are well off or high-income earners (this leads to extra costs incurred by the government that could be reduced if they know about individual's earning capacity). In that case by focusing mainly on the needy and poor, the government could reduce its administrative costs associated with welfare programs.