Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 6

Almost all welfare-type programs must have phase-out designs similar to those in the EITC to prevent everyone from being eligible. Keeping phase-out rates low can reduce their negative incentive effects, but lower rates necessarily mean that more people become eligible for welfare subsidies. With multiple programs (for example, the EITC in combination with food stamps and housing assistance subsidies), the combined phase-out rates can create a ''welfare wall'' that provides severe negative incentives to increase work. Is there any way around this problem? How should programs be integrated to prevent the creation of severe disincentives?