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) If the government gives the market value of the Medicaid, that is $10,000 to each recipient family, the general behavior of the poor families is to spend the amount in the purchase of other basic needs rather than spending on the medical expenses. Since medical expenses are not regular expenses, families below poverty line try to diversify the money allocated them to other required needs of the days.

(B) It is not advisable to determine poverty rate by valuing in-kind transfers at the price the government pays because the price paid by the government may not cover the cost of the program.

(C) As we know, one should prefer cash payment because such payments may allow the poor people to substitute into high valued goods and thus raise their standard of living.