Economics Training: Priceless
---
MasterCard is having a "Win a Home for the Holidays" sweepstakes.
But when you look at the fine print, it says that the prize is simply: "$350,000 one time payment that may be used towards a house..."
Why not just advertise the sweepstakes as a cash contest? Why the "Win a Home" bells and whistles? And does it matter to the winner whether the prize is "cash" or "house"?
Assume the prize really were a house. Those who remember (have nightmares about?) their Introductory Economics classes might recall how payments in kind, such as houses (or food stamps) can be suboptimal subsidies relative to just giving cash. Anyone remember "kinked budget lines" from Econ. 101? More "house" might give you more utility, but more cash will always give you the highest possible extra utility, especially if you already have lots of "house." The "kink" in the budget line (which here is meant not to matter) might matter. Go figure.
Ditto of course for food stamps. Making it a payment-in-kind rather than cash welfare creates a "kink" in the recipient's budget constraint that could result is obstructing utility-maximizing spending. Yet we continue the food stamp program (now a food card program) because, supposedly, we want the poor buying more food and not more cigarettes or lottery tickets or other "improper" items.
The irony, of course, is that food stamp recipients can simply substitute away the cash that they would have spent on food to the non-food items that the government doesn’t want to subsidize. The food stamps / food card might as well be cash. The "kink" in the budget line (which here is supposed to matter) might not matter (i.e., the opposite outcome as in the house giveaway). Go figure.
Bottom line: Cash is king. Treat it as such.
POST SCRIPT: I know it would help if I had some graphs of "kinked" budget lines and properly shaped indifference curves to illustrate my point, but a blog isn't a blackboard and I'm no good with the fancy graphics. Perhaps some of my loyal economics professor readers can help me with some links.
But when you look at the fine print, it says that the prize is simply: "$350,000 one time payment that may be used towards a house..."
Why not just advertise the sweepstakes as a cash contest? Why the "Win a Home" bells and whistles? And does it matter to the winner whether the prize is "cash" or "house"?
Assume the prize really were a house. Those who remember (have nightmares about?) their Introductory Economics classes might recall how payments in kind, such as houses (or food stamps) can be suboptimal subsidies relative to just giving cash. Anyone remember "kinked budget lines" from Econ. 101? More "house" might give you more utility, but more cash will always give you the highest possible extra utility, especially if you already have lots of "house." The "kink" in the budget line (which here is meant not to matter) might matter. Go figure.
Ditto of course for food stamps. Making it a payment-in-kind rather than cash welfare creates a "kink" in the recipient's budget constraint that could result is obstructing utility-maximizing spending. Yet we continue the food stamp program (now a food card program) because, supposedly, we want the poor buying more food and not more cigarettes or lottery tickets or other "improper" items.
The irony, of course, is that food stamp recipients can simply substitute away the cash that they would have spent on food to the non-food items that the government doesn’t want to subsidize. The food stamps / food card might as well be cash. The "kink" in the budget line (which here is supposed to matter) might not matter (i.e., the opposite outcome as in the house giveaway). Go figure.
Bottom line: Cash is king. Treat it as such.
POST SCRIPT: I know it would help if I had some graphs of "kinked" budget lines and properly shaped indifference curves to illustrate my point, but a blog isn't a blackboard and I'm no good with the fancy graphics. Perhaps some of my loyal economics professor readers can help me with some links.
Posted by Kip on
22 December 2005
To comment on this post, please visit the new blogsite.
