There are many equity or fairness based arguments for government engagement in anti-poverty programs — and for general government redistribution programs. But is there an efficiency case to be made for government programs that redistribute income? One such possibility lies in viewing government anti-poverty efforts as a public good —but whether or not this is a credible argument depends on how we think contributions to anti-poverty efforts enter people’s tastes.
A: Suppose there is a set A of individuals that contribute to anti-poverty programs and a different set B of individuals that receive income transfers from such programs (and suppose that everyone in the population is in one of these two sets).
(a) In considering whether there is an efficiency case to be made for government intervention in anti-poverty efforts, do we have to consider the increased welfare of those who receive income transfers?
(b) How would the individuals who give to anti-poverty programs have to view such programs in order for there to be no externality to private giving?
(c) If your answer to (b) is in fact how individuals view anti-poverty efforts, are anti-poverty efforts efficient in the absence of government intervention? If the government introduced anti-poverty programs funded through taxes on those who are privately giving to such efforts already, to what extent would you expect the government programs to “crowd out” private efforts?
(d) How would individuals have to view their contributions to anti-poverty programs in order for such programs to be pure public goods?
(e) If the conditions in (d) hold, why is there an efficiency case for government redistribution programs?
(f) If government redistribution programs are funded through taxes on the individuals who are voluntarily giving to anti-poverty programs, why might the government’s program have to be large in order to accomplish anything?
(g) How does your answer to (f) change if there is a third set of individuals that does not give to anti-poverty programs, does not benefit from them but would be taxed (together with those who are privately giving to anti-poverty programs) to finance government redistribution programs.
(h) Some argue that private anti-poverty programs are inherently more effective because civil society anti-poverty programs make use of information that government programs cannot get to. As a result, the argument goes, civil society anti-poverty efforts achieve a greater increase in welfare for the poor for every dollar spent than government redistributive programs. If this is indeed the case, discuss the tradeoffs this raises as one thinks about optimal government involvement in anti-poverty efforts.
B: Denote individual n’s private good consumption as xn, the government contribution to antipoverty efforts as g and individual n’s contribution to anti-poverty efforts as zn. Let individual n’s tastes be defined as un (xn, y, zn) = xα nyβzγn. (Assume that anti-poverty efforts are pure transfers of money to the poor.)
(a) What has to be true for anti-poverty efforts to be strictly private goods?
(b) What has to be true for anti-poverty efforts to be pure public goods?
(c) Suppose the condition you derived in (a) applies (and maintain this assumption until you get to part (g)). Suppose further that there are N individuals that have different income levels — with n’s income denoted in. Will private anti-poverty efforts be funded efficiently when g = 0? What will be the equilibrium level of private funding for anti-poverty programs when g = 0 as N gets large?
(d) If the government increases g without raising taxes, will private contributions to anti-poverty efforts be affected (assuming still that the condition derived in (a) holds)?
(e) Suppose the government instead levies a proportional tax t on all income and uses the funds solely to fund g. How much private funding for anti-poverty programs will this government intervention crowd out? By how much will overall contributions to anti-poverty programs (including the government’s contribution) change? (Consider again the impact on the individual’s optimization problem.)
(f) Can this government intervention in anti-poverty efforts be justified on efficiency grounds?
(g) Suppose instead that the condition you derived in (b) holds. To simplify the analysis, suppose that the N people who care about anti-poverty programs all have the same income level I (as well as the same preferences). What is the equilibrium level of funding for anti-poverty programs when g = 0?
(h) What happens to overall funding (both public and private) when the government increases g without changing taxes?
(i) If the government instead imposes a proportional income tax t and uses the revenues solely to fund g, what happens to overall funding of anti-poverty efforts assuming the N individuals still give positive contributions in equilibrium?
(j) Under what condition will the balanced budget (t, g) government program raise the overall funding level for anti-poverty programs?