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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

What is Economics and why it is important
Abdul Reply
What is Inflation
Abdul Reply
why price and quantity increase
Otuu Reply
condition under which price and quantity will be increased at the same time
Otuu
factors that hinders mobility of labour
Dennis Reply
what is scarcity
Adams Reply
why are people still unemployed in this economy we live in
Joyce Reply
why are people still unemployed in this economy
Joyce
Because of high technology
Innocent
Due to low government expenditure, the state does not have money to invest in new projects that can result in more job opportunities.
Young
good afternoon all, what are the examples of development projects Pls?
James
I 'm not together with him, when we say government expenditure mean there is recession for her economic country. That why many people still unemployed in this economy we live in, it mainly depend for two phases like Natural hazards and human activities.
Innocent
For the first answer I was responded we are concerns to intensive technology in the whole world it lead to reduce of many workers.
Innocent
wat does the abbreviation ppc mean?
Tumiso
I would like to give you ideas so that you get well how can give answer to this question dears. Attempt to know these words and what these means; Deficit, Surplus and Balanced budget.
Innocent
ppc mean pay -per-click known as search engine marketing
Innocent
i found it ppc means production possibility curve
Tumiso
in economic is that true according to your answer, however about of Marketing is that Pay Per Click.
Innocent
how is inflation, output gap relate to monetary policy
Mary Reply
what are the best strategy when it comes to exporting trade? #Philippines
TuroN Reply
the demand function for 2 commodities A and B in oshiosi are given as follows QA =96-2P-3PB Qã=30-25pA +0.32y where PA and Pa are prices of commodity And B respectively. and Y is cobsumer's money income given PA=N2,PB=N4 and y=1000 compute the price elasticity of demand for commodity A what is the income elasticity of demand for commodity B
divine Reply
what is scarcity
Pekayin Reply
Insufficient to meet the demand
LAEC
inadequate of demand
dawud
meet their demand
DAVID
lack of raw material
jatty
it may be manpower or raw stock for finished goods
jatty
what is the difference between theory and model?
Mabel
decrease in supply of goods
Emmanuel
corner in my heart
Shno
type of inflation
Tei
limited resources unlimited human wants is scarcity
javaria
what is a market structure
Albert Reply
what are the causes of inflation
Samuel Reply
cost push or demand pull inflation
Chuye
ok
Albert
what is the difference between cost push and demand pull
Gifty
the definition for economics here,is it waec standard,please😯😯
Mojekwu Reply
what is inflation
Nsiah Reply
inflation is when much money is chasing few goods
Mojekwu
inflation is when a price of good(s) increase and decriase.
Albert
inflation is the persistent rise in prices if goods
Gifty
what is demand
Nana Reply
demand is the amount of goods consumers are willing and able to but at a particular rate
Gifty

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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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