Question

Your government desires that the poor in your economy eat more French Vanilla Ice Cream (a healthy protein supplement).  So it taxes the rich and gives the tax revenues as a $20.00 per-month subsidy to each poor person with which she/he MUST spend on this ice cram flavor.
 
 (a)With the price of "all other goods (AOG)" at $1.00 per unit and the price of French Vanilla Ice Cream at $1.00 for dollar each carton, show how a typical poor person with an income of $100 per month might buy all other goods and apples before the subsidy and after the subsidy.
 
(b) Now, on the same diagram, show from a micro-theory standpoint, how the typical poor person would be better off if she/he were given the $20.00 straight out rather than being forced to buy ice cream.
 (c)What is the theory trying to tell us when we say that the typical poor person would be "better off" with the $20.00 cash?
 
 (d) Often we hear the argument that we should not just give money to the poor because they will just buy alcohol and other intoxicants in order to forget their misery.  Does this position make any sense, and what does it say about the poor being "better off" with cash payouts?

Answer 1