Paternalism and the alleviation of poverty
Typically the tools available for redistribution are price subsidies and direct cash transfers. Conventional economic theory indicates that the efficiency loss is minimized if cash transfers are used instead of price subsidies. But in almost all economies, including advanced economies, price subsidies are implemented and cash transfers are seldom used. The author argues that taxpayers enjoy the poorer citizen's specific consumption package more than improving the poorer citizen's general economic welfare. Her objective is to identify the conditions under which price subsidies represent a more efficient way of alleviating poverty than cash payments, given taxpayers'paternalistic preferences. She concludes that when the taxpayers'prevalent behavior is paternalism, and taxpayers have more weight in society, the option for redistribution would be to target price subsidies to the poor. This brings about a greater improvement in overall social welfare and happier taxpayers than any other policy. With this solution, the poor are somewhat better off, even though they would rather receive cash transfers, which would represent the same financial cost to the economy.
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- Ravi Kanbur & Michael Keen & Matti Tuomala, 1990.
"Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty,"
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