Question

The poverty rate would be substantially lower if the market value of in-kind transfers were added to family income. The largest in-kind transfer is Medicaid, the government health program for the poor. Let’s say the program costs $10,000 per recipient family.

a. If the government gave each recipient family a $10,000 check instead of enrolling them in the Medicaid program, do you think that most of these families would spend that money to purchase health insurance? Why? (Recall that the poverty level for a family of four is about $23,000.)

b. How does your answer to part (a) affect your view about whether we should determine the poverty rate by valuing in-kind transfers at the price the government pays for them? Explain.

c. How does your answer to part (a) affect your view about whether we should provide assistance to the poor in the form of cash transfers or in-kind transfers? Explain.

Answer 1

a) No, I don't think that upon receiving a check of $10,000, a poor household would spend it on healthcare. This is because apart from health, poor people have other more pressing concerns like food and housing. So, that is where they would spend a major proportion of that income.

b) Poverty rate should be determined by valuing the in-kind transfer payments at the price the poor family would have had to pay to consume the same amount of goods. How the family would spend the cash transfer shouldn't be considered.

c) I would suggest that assistance should be provided to the poor in the form of cash transfers. This is because of the fact that a direct cash transfer would expand the consumption possibilities of the poor. As discussed in part a) above, poor people would be better off spending an additional amount on food and housing, rather than healthcare.