EconLog Price Theory: Cash Transfers

We’re bringing back price theory with our series on Price Theory problems with Professor Bryan Cutsinger. You can see all of Cutsinger’s problems and solutions by subscribing to his EconLog RSS feed.

Share your proposed solutions in the Comments. Professor Cutsinger will be present in the comments for the next couple of weeks, and we’ll post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!

Question: One common argument against public assistance taking the form of direct cash handouts is that the recipients will use the money to buy things that taxpayers find objectionable, e.g., illicit drugs, gambling, etc. To avoid this outcome, the argument goes, public assistance should take the form of in-kind transfers, e.g., food, housing, medical care, etc. What does this argument assume about the income elasticities of objectionable goods? Suppose the recipients could costlessly resell the in-kind transfers. In this case, is there any difference between direct cash handouts and in-kind transfers?