David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

5.6 Transfers in kind
that to the same cake with two balls of ice cream. Having more of one of the two goods does not make you
happier, since you always prefer to consume the two goods in fixed proportion. This explains the L-shaped
indifference curves. The slope of the dashed straight line starting from the origin is the fixed proportion in
which the two goods are consumed.
Ti_ ra _ n _ s f_er _ s _ in _ k_ i n _ d
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Social security payments are a monetary transfer. Wages are not: the recipient
provides labour services in exchange for wages. An example of a transfer in kind
is food stamps, given to the poor to buy food. The stamps must be spent on food,
not beer, films or petrol. We now use our model of consumer choice to ask whether
an in-kind transfer payment is preferred by the consumer to a cash transfer
payment of the same monetary value.
A transfer payment is
a payment, usually by the
government, for which no
corresponding service is
provided by the recipient.
A transfer in kind is the gift
of a good or service.
The consumer has £100 to spend on food or films, each costing £10 per unit. Figure
5.20 shows the budget line AF. Suppose the government issues the consumer with stamps worth 4 food
units. For any point on the old budget line AF, the consumer can have 4 more units of food from the food
stamps. Moving horizontally to the right by 4 food units, the new budget line is BF'. Since food stamps
cannot buy films, the new budget line is ABF'. The consumer can still get at most 10 films.
Suppose the consumer originally chose e on the budget line AF. Since both goods are normal, the shift in
the budget line to ABF' - effectively a rise in income - makes the consumer choose a point to the northeast
of e, as she would have done had the transfer been in cash.
When food costs £10 per unit, the cash equivalent
of 4 food units is £40, shifting the budget line to
A'F'. Thus, if the consumer begins at e, it makes no
difference if the transfer is in cash or in kind.
Suppose, however, that the consumer begins at e'. With
a cash payment, the consumer might move to point con
the budget lineA'F'. The transfer in kind, by restricting
the consumer to the budget line ABF', prevents her
reaching the preferred point c. Instead she moves, say,
to the feasible point B. B must yield the consumer less
utility than c: when she got a cash payment and could
choose either point, c was preferred to B.
II)
E
-
u:
14 A' :
I
Cash transfers let consumers spend the extra income
in any way that they wish. Transfers in kind may
limit a consumer's options. Where they do, the
increase in consumer utility is less than under a cash
transfer of the same monetary value.
Yet transfers in kind are politically popular. The
electorate wants to know that taxes are being wisely
spent. Some people argue that the poor really do not
know how to spend their money wisely and may
spend cash transfers on 'undesirable' goods such as
alcohol or gambling rather than on 'desirable' goods
such as food or housing.
Meals
A food transfer in kind may leave consumers less satisfied
than a cash transfer of the some value. A consumer at e'
might wish to spend less than the full allowance on food,
moving to c. The budget line is A'BF' under a cash transfer.
The in-kind transfer restricts the budget line to ABF'.
10
Figure 5.20 Transfers in cash and in kind
14
F'
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