2. Both transfer programs and taxes affect incentives.

Consider a program designed to help the poor that promises each aid recipient a minimum income of

$10,000. That is, if the recipient earns less than $10,000, the program supplements his income by enough to bring him up to $10,000.

Explain why this program would adversely affect incentives for low-wage recipients. (Hint: Show that this program is equivalent to giving the recipient

$10,000 and then taxing his labor income at a high marginal rate.) Describe a transfer program that con tains better incentives. Would that program have any disadvantages? If so, what would they be?