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Flashcards in Transfer Payments and Direct Provision Deck (12)
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1

Transfer Payments

a welfare payment made that is not linked to economic output

2

Examples of Transfer Payments

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

3

Purpose of Transfer Payments

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

4

Are Transfer Payments a part of GDP?

No

5

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.

6

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).

7

Direct Provision

government provision of merit goods and public goods.

8

Examples of Direct Provision

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

9

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.

10

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.

11

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).

12

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.