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CHAPTER 2 THEORETICAL TOOLS OF PUBLIC FINANCE 55

Others argue that all that matters is equality of opportunity, whereby indi-
equality of opportunity The
viduals are guaranteed an equal chance to succeed, but if some do and others principle that society should
do not, that is not the concern of the government. We discuss these alternative ensure that all individuals have
views and their implications for government policy in Chapter 17. equal opportunities for success
but not focus on the outcomes
of choices made.

2.4
Welfare Implications of Benefit Reductions:
The TANF Example Continued
he equilibrium and social welfare tools developed in Section 2.3 can be
T applied to evaluate the benefits and costs to society of reducing TANF
benefits. The benefits are the improvement in efficiency from removing a barri-
er to labor supply by single mothers, raising single mothers labor supply and
raising the size of the social surplus. (Relying on the empirical evidence dis-
cussed in the next chapter, we assume that labor supply increases when bene-
fits fall.) The costs are the reductions in equity that arise from reducing income
support to one of the lowest-income groups in our society. The job of public
finance economists is to measure these efficiency and equity consequences.
The job of policy makers is to trade the consequences off to decide on appro-
priate policy choices.
Efficiency We can apply the tools of welfare analysis to model the welfare
implications of cutting TANF benefits. Figure 2-17 shows the market for labor
services by single mothers. The price of labor, the wage (W), is on the vertical

FIGURE 2-17

Price of labor
(wage), W Welfare Implications of TANF
S2
Without TANF, the labor market is in
S3 competitive equilibrium at point X , the
intersection of S 1 and D 1. When TANF
S1 is introduced, labor supply falls to S 2,
Y and the market moves to a new equi-
W2 librium at point Y, creating a dead-
A Z weight loss of A B C D E.
W3 Deadweight When TANF benefits are reduced, sup-
B loss
D ply increases to S 3, and social effi-
W1 X ciency rises by A B C.
E
C

V
D1

H2 H3 H1 Quantity of labor
(hours worked), H

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