Distributional Externalities and the Optimal Form of Income Transfers." Public Finance Quarterly 1

When preferences exhibit certain interdependencies, redistributive transfers depends on the nature of the postulated externalities. Lump sum transfers cannot achieve some Pareto optima i f interdependence involves particular commodities. Here, price subsidies or earmarked (voucher) transfer schemes are required. However, i f the interdependence relates to the, geneml welfare of recipients, cash tmnsfers are preferable. Preferences revealed in the political process in favor of in-kind programs suggest “particular-commodity ’ ’ intzdependence. But even if this is so, the analysis does not provide a conclusive case for in-kind transfers. Among other things, comparative costs of administering and policing in-kind as opposed to cash programs must also be considered. can make everyone better off: However, the optimal form of such transfer