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Transfer Payments

a welfare payment made that is not linked to economic output


Examples of Transfer Payments

- Unemployment benefits.
- Housing benefits.
- State pensions.
- Disability benefits.
- Donations to charity.
- Pocket money.


Purpose of Transfer Payments

- Helps those people most in need.
- To improve the standard of living.
- Redistribution of income.


Are Transfer Payments a part of GDP?



Advantages of Transfer Payments

- Targets people most in need of help by providing a minimum level of income.
- This leads to an increasing in living standards of recipients, which helps to reduce inequality and lower the levels of poverty.


Disadvantages of Transfer Payments

- Costly to the government.
- Opportunity cost to the government.
- Expensive to administer (payments are looked into before they are made).
- Disincentive effects (some people may choose to remain on benefits instead of seeking employment).
- Unproductive (money is being taken out of the productive part of the economy (employed workers) and given to unproductive parts of the economy (unemployed people).


Direct Provision

government provision of merit goods and public goods.


Examples of Direct Provision

- Public goods, such as street lighting, road signs, information.
- Merit goods, such as education, healthcare.


Purpose of Direct Provision

- To overcome the free-rider problem associated with the provision of public goods.
- To overcome the problem of under-provision and under-consumption associated with merit goods.


How direct Provision Affects Demand Supply Curve

- Government supplies quantity a to the market for free (price = 0).
- At price = 0, quantity demanded (b) is more than the quantity supplied, resulting in excess demand (distance a to b).
- Queueing and rationing are likely to occur.


Advantages of Direct Provision

- More consumption of public goods and merit goods.
- The free-rider problem of public goods is overcome.
- The problem of under-production and under-consumption of merit goods is reduced.
- Higher standard of living (especially for poorer consumers).


Disadvantages of Direct Provision

- Expensive.
- Opportunity costs.
- Excess demand, which leads to rationing and queuing.
- Lack of profit motive by the government may reduce efficiency and lower quality.