2.

1 Constrained Utility
Maximization
2.2 Putting the Tools to Work:
TANF and Labor Supply
Among Single Mothers
Theoretical Tools of Public 2.3 Equilibrium and Social
Welfare
Finance 2.4 Welfare Implications of
Benefit Reductions: The TANF

2
Example Continued
2.5 Conclusion
Appendix to Chapter 2
The Mathematics of Utility
Maximization

L
ife is going well. After graduating at the top of your college class, you
have parlayed your knowledge of public finance into an influential job
with your states Department of Health and Human Services (HHS),
which oversees, among other things, the Temporary Assistance for Needy
Families (TANF) program. This program provides cash payments to single
mothers whose income is below a specified level.
Your new job thrusts you into the middle of a debate between the states
governor and the head of your department, the HHS secretary. The governor
believes that a major problem with the TANF program is that, by only provid-
ing income to very low income single mothers, it encourages them to stay at
home rather than go to work. To provide incentives for these mothers to
work, the governor wants to cut back on these cash benefits. The secretary of
the department disagrees. He thinks that single mothers who are home with
their children are incapable of finding jobs that pay a wage high enough to
encourage them to work. In his view, if the state cuts the cash payments, it will
simply penalize those single mothers who are staying home.
The secretary turns to you to inform this debate by assessing the extent to
which cutting cash benefits to low-income single mothers will encourage
them to work, and by evaluating the net welfare implications for the state if
these benefits are cut. Such an evaluation will require that you put to work the
economics tools that you have learned in your introductory and intermediate
courses. These tools come in two flavors. First are the theoretical tools, theoretical tools The set of
the set of tools designed to understand the mechanics behind economic deci- tools designed to understand
the mechanics behind economic
sion making. The primary theoretical tools of economists are graphical and decision making.
mathematical. The graphical tools, such as supply and demand diagrams and
indifference curve/budget constraint graphs, are typically all that you need to
understand the key points of theory, but mathematical expositions can also
help to illustrate the subtleties of an argument. In the main body of this book,
we rely almost exclusively on graphical analysis, with parallel mathematical
analysis presented in some chapter appendices.

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