Question

Senator Ostrich suggests that "in order to end poverty, all we need to do is pay everyone making less than the poverty line the difference between what they are earning and the poverty line." Ostrich argues that, based on the set of people currently below the poverty line, this would cost $98 billion per year. Why is Ostrich understating the costs of this program?

Answer 1

Answer: Ostrich is underestimating the costs for which in addition to costing 98 billion per year, to collect that money they will have to collect more taxes. This will cause that when the income tax increases, the workforce produces a lower net return making the opportunity cost of leisure less and this can result in those who pay taxes to finance the program reduce their working hours reducing productivity

It is also possible that the proposed benefits have a negative effect on people by inducing them to work less to access these benefits while also reducing overall productivity.