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By the end of this section, you will be able to:
  • Explain the poverty trap, noting how it is impacted by government programs
  • Identify potential issues in government programs that seek to reduce poverty
  • Calculate a budget constraint line that represents the poverty trap

Can you give people too much help, or the wrong kind of help? When people are provided with food, shelter, healthcare, income, and other necessities, assistance may reduce their incentive to work. Consider a program to fight poverty that works in this reasonable-sounding manner: the government provides assistance to the poor, but as the poor earn income to support themselves, the government reduces the level of assistance it provides. With such a program, every time a poor person earns $100, the person loses $100 in government support. As a result, the person experiences no net gain for working. Economists call this problem the poverty trap    .

Consider the situation faced by a single-parent family. A single mother (earning $8 an hour) with two children, as illustrated in [link] . First, consider the labor-leisure budget constraint faced by this family in a situation without government assistance. On the horizontal axis is hours of leisure (or time spent with family responsibilities) increasing in quantity from right to left. Also on the horizontal axis is the number of hours at paid work, going from zero hours on the right to the maximum of 2,500 hours on the left. On the vertical axis is the amount of income per year rising from low to higher amounts of income. The budget constraint line shows that at zero hours of leisure and 2,500 hours of work, the maximum amount of income is $20,000 ($8 × 2,500 hours). At the other extreme of the budget constraint line, an individual would work zero hours, earn zero income, but enjoy 2,500 hours of leisure. At point A on the budget constraint line    , by working 40 hours a week, 50 weeks a year, the utility-maximizing choice is to work a total of 2,000 hours per year and earn $16,000.

Now suppose that a government antipoverty program guarantees every family with a single mother and two children $18,000 in income. This is represented on the graph by a horizontal line at $18,000. With this program, each time the mother earns $1,000, the government will deduct $1,000 of its support. [link] shows what will happen at each combination of work and government support.

The poverty trap in action

The graph shows a downward sloping line that begins at $20,000 on the y-axis and ends at 2,500 on the x-axis. A horizontal line extends from $18,000 on the y-axis. A dashed plum line extends from $16,000 on the y-axis and intersects with the vertical line extending from 500 on the x-axis at point A. Beneath the x-axis is an arrow pointing to the right indicating leisure (hours) and an arrow pointing to the left indicating labor (hours).
The original choice is 500 hours of leisure, 2,000 hours of work at point A, and income of $16,000. With a guaranteed income of $18,000, this family would receive $18,000 whether it provides zero hours of work or 2,000 hours of work. Only if the family provides, say, 2,300 hours of work does its income rise above the guaranteed level of $18,000—and even then, the marginal gain to income from working many hours is small.
Total income at various combinations of work and support
Amount Worked (hours) Total Earnings Government Support Total Income
0 0 $18,000 $18,000
500 $4,000 $14,000 $18,000
1,000 $8,000 $10,000 $18,000
1,500 $12,000 $6,000 $18,000
2,000 $16,000 $2,000 $18,000
2,500 $20,000 0 $20,000

Questions & Answers

The quantity of a good demanded rises from 1000 to 1500 units when the price fallsfrom$1. 50 to$1. 00 per unit. Find the price elasticity of demand?
Rishiraj Reply
what is meant by Regional policy
Itz Reply
what is demand
Tangwe Reply
nice question..
Suman
what is aggregate demand and the equation for Y(GDP)
Davido Reply
what is cost concept
Fatai Reply
is a type of mechanism which makes consumers and individuals understand the price of goods and services
Davido
who is the father of Economics
John Reply
i dont know
Suman
Adam Smith
deep
hi
Zafraan
Adam
Zafraan
smith
Zafraan
Adam Smith
Bevingtone
What is opportunity cost
Bevingtone
is the value of the next best thing you give up when making a decision.
Bongiwe
opportunity cost is a made in order to enjoy something else
Laila
what is cost concept
Fatai
Adam Smith
Md
Adam Smith
Akligo
Adam Smith
Samura
What is demand and supply
Ehwehwe
demand refers to goods and services which consumers are willing and able to buy at a particular period of time and supply refers to the goods and services which consumers are willing and able to offer for sale at a particular period of time
Davido
demand is the quantity of goods and services which a particular customer is willing and able to purchase at that point in time.while supply is a quantity of goods and services which the company is willing and able to render to the customer who purchased it at that point
Israel
Adam Smith
Israel
cost concept. it is used for analyzing the cost of a project in short and long run
Israel
opportunity cost can be seen as a forgone alternative. it can be seen as the loss of other alternatives when one alternative is chosen
Israel
cost is value of imput and output at particular period of time. but we can classify in short run and long run.
Nago
Cost is the aggregated sum accrue in procuring something worthwhile.
KATUNKUS
Adam Smith
Som
Adam Smith
Tandan
Adam smith
Hafiz
what is the formula for elasticity
Umar Reply
perc of qty chg/perc of price chg
Suman
ok
Umar
I need some help regarding economic numericals.
Hassan
Send your problems
Tandan
utility
Oppong
demand or supply equation dy hn OK iska schedule bnana above equation ko dekhty hue kasy bnaye gy
Saba
what is cobweb?
Solomon Reply
A spider's web, especially when old and dusty (The wooden carvings were almost obliterated by cobwebs)
huzaif
what is Economic
Mbarohey Reply
Economic is a social science that study human behavior in relationship with end and scarce means which have alternative uses
Agyenkwa
Economics is an inquiry into nature that causes wealth of nations.
Eric
what are the importance of economic
Mbarohey
it helps us use our limited resources to satisfy our unlimited wants
Daniel
economic is the science of wealth
Joseph
it's helps us to be current on what's going on in the world
Joseph
economics can be defined as the science of wealth
Joseph
what are the advantages of sole proprietorship
Mbarohey
is the study of mankind in the ordinary business
Awini
Economic is science which study human behavior in relation to relatively scarce resources and how they are managed
Akligo
What is the formula for calculating elasticity?
Haruna Reply
(%change in quantity) / (%change in price)
Rahul
thx
lil
.
Tandan
.
Tandan
government spending increase will cause economic grew
Jia Reply
no
Helicia
no because government expenditure is very high the growth of the economy will decrease
Davido
what is trade by batter
Iko Reply
trade involves the transfer of good or services from one person to another, often in exchange for money.
musadique
Now trade by batter :it may define as form of trading in which good are exchange directly for other goods without the use of money as medium of exchange
musadique
is it good to trade with something with a value but given something which has no value
sandra
trade in batter means the exchange of goods and services without using money
Maa
It may be defined as an exchange of goods to satisfy the needs of two parties
Haruna
is the exchange of goods and services for the consumption of human wants
Davido
mention six factors that explain efficiency and productivity of labour
fanelchainz Reply
mention six factors that explain efficiency and productivity of labour
bohvy
factors that explain efficiency of labor are 1.population, 2.technology, 3.education, 4.working environment, 5.incentives (tax holidays) and 6.religious or cultural beliefs.
Solomon
What is demand
SoFIA Reply
is the abulity and willingness of a consumer to purchase goods and services at a particular peeiod of time in a given price
Fadhil
Is goods or service that a consumer is willing and able to purchase at a particular time over a giving period of time
Konja
is the ability and the willingness to buy a goods at a particular period of time in a given price
Prince
please go ahead it's been long time you all are explaining basic topics so now there are many topics left you have to discuss them .
Zahid
what is a central bank
Fadhil Reply
transactionsss with all banks of any country
Economics

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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