Question

Consider a welfare program (such as food stamps) with benefits that decrease as an individual’s income increases. Draw the individual’s budget constraint with and without the subsidy. (Put hours of work on the horizontal axis, and income on the vertical axis.) Use the diagram to illustrate how work incentives are reduced and how a fixed dollar subsidy could lead the individual to the same level of utility at lower dollar cost

Answer 1

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*Answer:

The Supplemental Nutrition Assistance Program, or “SNAP,” the new name for the Food Stamp Program, is America’s largest and most important nutrition assistance program. It provides low-income people with money they must use to purchase food. The modern program was established as part of the War on Poverty in the 1960s, but it has undergone a ton of changes since then. For example, the government now gives recipients electronic debit cards, rather than stamps, for buying food. Those changes are one reason Congress decided in 2008 to rename the program—to signal a fresh star

Food stamps: why recipients are haunted by stigmas and misconceptions.Food stamps. Unemployment benefits. Social security. Earned income tax credits.Do these social welfare programs work? Yes, according to a new study from the Pew Charitable Trusts.Safety nets like food stamps prevent millions more people from struggling to put food on the table, says Jake Grovum, who analyzed the data for the Pew Charitable Trusts.

• Pew Charitable Trusts imagines an America without social welfare programs
• More than 45 million Americans are currently living in poverty
• Without social security, the poverty rate for Americans 65 and older would jump nearly 40%

• The benefits cliff: when minimum wage increases backfire on people in need

Grovum’s findings:

• For people of all ages, the official poverty rate in the US was 14.5%. That’s equivalent to 45.3 million people.
• Without food stamps, the poverty rate would be 17.10% – another 8 million Americans would be living in poverty.
• Without social security, the poverty rate for Americans 65 and older would be 52.67% instead of the current 14.6%.
• Without tax credits like the federal earned income tax credit, poverty for children under 18 would be 22.8% instead of the official poverty rate of 19.9%.

These numbers are important. US lawmakers have long struggled to show exactly how and where certain types of government assistance are helping Americans stay out of poverty.

Equilibrium in a Competitive Labor Market

The labor market is in equilibrium when supply equals demand; E* workers are employed at a wage of w*. In equilibrium,all persons who are looking for work at the going wage can find a job. The triangle P gives the producer surplus; the triangle Q gives the worker surplus. A competitive market maximizes the gains from trade, or the sum P + Q.

Competitive Equilibrium in Two Labor Markets Linked by Migration

The wage in the northern region ( w N ) exceeds the wage in the southern region ( w S ). Southern workers want to move north, shifting the southern supply curve to the left and the northern supply curve to the right. In the end, wages areequated across regions (at w * ). The migration of workers reduces the gains from trade in the South by the size of the shaded trapezoid in the southern labor market, and increases the gains from trade in the North by the size of the larger shaded trapezoid in the northern labor market. Migration increases the total gains from trade in the national economy by the triangle ABC.

work incentives and fixed dollar subsidy :

The labor market is in equilibrium when supply equals demand; E* workers are employed at a wage of w*. In equilibrium, all persons who are looking for work at the going wage can find a job. The triangle P gives the producer surplus; the triangle Q gives the worker surplus. A competitive market maximizes the gains from trade, or the sum P +Q.The labor demand curve is shifted not only by payroll taxes but also by government subsidies designed to encourage firms to hire more workers. An employment subsidy lowers the cost of hiring for firms. In the typical subsidy program, the government grants the firm a tax credit, say of $1, for every person-hour it hires. Because this subsidy reduces the cost of hiring a person-hour by $1, it shifts the demand curve up by that amount, as illustrated in Figure above. The new demand curve ( D 1 ) gives the price that firms are willing to pay to hire a particular number of workers after they take account of the employment subsidy. Labor market equilibrium shifts from point A to point B. At the new equilibrium, there is more employment (from E 0 to E 1 ). In addition, the subsidy increases the wage that workers actually receive (from w 0 to w 1 ), and reduces the wage that firms actually have to pay out of their own pocket (from w 0 to w 1 _1).The labor market impact of these subsidies can be sizable and will obviously depend on the elasticities of the labor supply and the labor demand curve. For instance, if the labor supply elasticity is 0.3 and the labor demand elasticity is _0.5, it has been estimated that a subsidy that reduces the cost of hiring by 10 percent would increase the wage by 4 percent and increase employment by 2 percent.

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