Jumping the welfare gap in designing public transfers

Simonovits Andras ()
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Simonovits Andras: Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences, also Mathematical Institute of Budapest University of Technology

No 1707, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: We consider three transfer models with a representative individual who discounts the utility of the merit good with respect to the standard one's. In each model, a paternalistic government taxes the consumer and transfers him additional merit goods in return. The private purchase of the merit goods is cheaper than the transfer. Even if the optimal transfer system is welfare superior to the transfer-free system, a system with much lower transfer may be inferior, therefore this welfare gap should be jumped. Various pension modelers (e.g. Feldstein, 1985; van Groezen, Leers and Meijdam, 2003) overlooked this problem and drew wrong conclusions.

Keywords: transfers; pensions; taxes; social welfare; paternalism (search for similar items in EconPapers)
JEL-codes: D10 H55 J13 J14 J18 J26 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-03
New Economics Papers: this item is included in nep-age, nep-pbe and nep-upt
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