Question

As part of its economic stimulus package the government is considering providing support to consumers for weatherizing their homes. This support can be provided in three ways:

(1) Sending all households a check of $600 along with a flyer describing the benefits of weatherization in the hopes that consumers will use most of the money for home weatherization

(2) Providing a $5 tax-free subsidy to households for every dollar they spend on home weatherization up to a total subsidy of $600.

Or,

(3) A tax-free lump sum of $600 that is sent to all interested applications (households) to be used ONLY for home weatherization.

A. Which program design do you think will make an individual consumer best off according to the standard definition of efficiency (which is - reaching the highest possible indifference curve possible). Illustrate with a diagram. Draw home weatherization expenditures on the horizontal axis.

B. If you were the government official dispensing this money, which program would you support in order to achieve the goals of diffusing home weatherization as widely as possible? Illustrate your argument with simple diagrams.

Answer 1

The program design that will make an individual consumer best off according to the standard definition of efficiency is providing a tax-free lump sum of $600 that can only be used for home weatherization. If the goal is to diffuse home weatherization as widely as possible, providing a $5 tax-free subsidy for every dollar spent on home weatherization would be most effective.

Step-by-step explanation:

In order to determine which program design will make an individual consumer best off according to the standard definition of efficiency, we need to consider the impact of each program on the consumer's utility. The program that provides the highest level of utility will be the most efficient.

Let's consider the three program designs:

1. Sending all households a check of $600 along with a flyer describing the benefits of weatherization: This program design provides consumers with a lump sum of money that they can choose to spend on weatherization or other goods and services. The impact on utility will depend on the consumer's preferences. If weatherization is a high priority, consumers may choose to spend a large portion of the money on home weatherization. However, since there is no requirement to use the money for weatherization, some consumers may choose to spend it on other goods and services, reducing the overall impact on efficiency.
2. Providing a $5 tax-free subsidy for every dollar spent on home weatherization: This program design provides an incentive for consumers to spend money on home weatherization by offering a subsidy. The subsidy increases the consumer's purchasing power, making it more affordable to invest in weatherization. This program design can encourage more people to spend money on weatherization, increasing overall efficiency.
3. Providing a tax-free lump sum of $600 that can only be used for home weatherization: This program design restricts the use of the money to home weatherization, ensuring that it is used for its intended purpose. This can maximize the impact on efficiency by ensuring that the money is not used for other goods and services.

Based on the above analysis, the program design that will make an individual consumer best off according to the standard definition of efficiency is the third option - providing a tax-free lump sum of $600 that can only be used for home weatherization. This design ensures that the money is used for its intended purpose and maximizes the impact on utility.

As a government official, if the goal is to diffuse home weatherization as widely as possible, the second program design - providing a $5 tax-free subsidy for every dollar spent on home weatherization - would be most effective. This design incentivizes consumers to spend money on weatherization by offering a subsidy, which can encourage a larger number of households to invest in weatherization.