While relief effort is underway amid criticism, the government announced yesterday that flood victims are to get monetary aid:
Between food or other typical aid — henceforth, I shall refer to as commodity — and cash, which actually is the best to offer?
First, assume that there’s a constant amount of amount of cash and commodity for aid throughout this blog entry.
In circumstances where commodity supply is relatively stable, aid in cash might be the best. The reason is, every person has his or her (for simplicity’s sake, let me use the pronoun “he”. For all the feminists out there, I still love you guys! Or rather, girls) own preference. A person most of the time knows what he wants or needs the best. In economics, a person’s well-being could be measured by utility function. A utility function according to Wikipedia is “a measure of the relative happiness or satisfaction (gratification) gained by consuming different bundles of goods and services“. While utility is a basic concept in economics, it’s something hard to measure by a third person and usually, the person himself knows his utility own function the best. Through the person’s own preference, he, assuming rationality and complete information, will maximize his own consumption under relevant constrictions accordingly.
In emergency where shortage is widespread however, cash aid might not be the better mean of relieving victims of any disaster. This is especially so if the cash value isn’t large enough to purchase sufficient food and other necessary survival materials such as blanket, clothes, etc. During severe shortage period, prices will be higher than during peaceful times and with a specific amount of cash, a person will be able to buy less amount of food and other things that matter vis-a-vis during stable time.
A commodity-type aid is superior to cash-type aid if and only if the cash value of commodities is greater than cash value. Cash-type aid is superior to commodity-type aid if and only if the value of cash is greater than the value of the commodities. In short, the superiority order of the two kinds of aid depends on the value of the an aid relative to the other.
It must be noted that this comparison ignores the fact that monetary aid has considerably less logistical problem attached to it compared to the other aid type.
Regardless the two scenarios, an aid beneficiary could achieve higher welfare given any aid endowment if the beneficiary could trade with, of course, other people.
2 replies on “[1020] Of flood, aid and economics”
I quote myself “In short, the superiority order of the two kind of aids depends on the value of the aids relative to each other.”
Mydeen wonders, in a flooded zone, what good is cash when all the shops and places to purchase are also submerged under 6 feet of water ? Even basic necessities would have by now soiled with muddy water.
Commodities address an immediate need, while the cash would go a long way towards rebuilding and recovering when the waters have subsided.
Cash by itself is not the solution, Johnny.