U8216 Microeconomics and Policy Analysis
Fall 2000
Group Project 1

PDF

Under the food stamp program in the United States now, eligible households receive coupons every month.  Legally, the coupons can be used only to purchase food at approved stores.  The number of coupons a household receives is determined by a very complex formula.  “Cashing-out” means sending checks instead of coupons; some cashing-out proposals also talk about changing around the value of what some households receive.

     Since many New York workfare participants also receive food stamps, the Union of NYC Workfare Participants (UNYCWP) is interested in these proposals, and has hired you to advise them about whether they should support cashing-out in some form.  They want you to make a presentation of about 20 minutes to them, and also to answer their questions.  They love diagrams.

     To give you some idea of the magnitudes involved: A single adult, living alone, would get at most $111 a month in food stamps, if he or she had a very low income and reasonably high rent.  A family of three receiving TANF benefits and paying typical rents would get about $217 a month in food stamps in New York City.  On the other hand, expenditure surveys have found that households in the bottom 20% of the income distribution spend on average about $120 per month per person on food (this includes food stamp-backed purchases), out of average total expenditures of around $500 per month per person.

     Among the questions they think you might want to address are:

·          Under pure cashing-out, what recipients would be better off?  What recipients would be worse off?  What recipients would be just as well off?  (They really want to see some indifference curves and budget sets on this.)  Would the recipients who are better off in terms of preference-satisfaction be better off in terms of health?  Which is more important?

·          In many cities there is now an illegal resale market in food stamps.  In this market, coupons are bought and sold at about 70¢ on a dollar of face value.  How does this illegal market change the analysis of the first set of questions?  If the market were legalized, what do you think the price of coupons would be?  Would it be better just to legalize this market, rather than cashing-out the food stamps?

·          Why did the federal government start giving food stamps rather than money in the first place?  Do the people who support the food stamp program care more about recipients’ utility or their health and what they consume?  The value of food stamps has roughly kept pace with inflation in the last 20 years, but the value of cash welfare grants has not.  Would cashed-out food stamps be treated more like food stamps in the future, or like cash welfare grants?

·          Many poor people eat at soup kitchens, and some soup kitchens ask people who receive food stamps to donate them.  How does the possibility of eating at soup kitchens affect your diagrams for cashing-out?  How would cashing-out affect the operation of soup kitchens?  How would it affect the people who eat at soup kitchens but don’t get food stamps?

·          (A hard question)  For many recipients, the value of the food stamps they receive every month is increased by 30¢ for every dollar they pay in rent above a certain level.  What do these households’ budget sets look like?  (Now there are three goods: food, housing and everything else.  Try drawing budget sets for housing vs everything else first.)  Should this rent subsidy be cashed out as well?  If so, how?

·          Are there good alternatives to pure cashing-out?

·          What should UNYCWP do?

You should also prepare for distribution a summary (one page or less) of your recommendations.