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Income Redistribution

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Income Redistribution

If you were rich, what would you do with your money? A lot of people say that they'd donate at least a portion of their earnings to charity or the less fortunate. But how does that actually play out? And is there a way for everyone to be able to help those who are less fortunate without being millionaires themselves? There is a way and it's called - income redistribution. To learn more about how income redistribution works, the strategies used, examples, and more, keep reading on!

Income Redistribution Definition

Income and poverty rates differ widely among and within specific categories of people (such as age, sex, ethnicity) and nations. With this gap between the income and poverty rates, something that is often brought up is income inequality, and not long after that income redistribution. When there is income redistribution, it's exactly as it sounds: income is redistributed throughout the society so as to lessen the income inequality present.

Income inequality refers to how income is distributed unequally across a population.

Income redistribution is when income is redistributed throughout the society so as to lessen the income inequality that's present.

Income redistribution aims to promote economic stability and possibilities for society's less affluent members (essentially narrowing the gap between the poor and the wealthy), and so frequently includes financing for social services. Because these services are paid by taxes, people who advocate for income redistribution claim that higher taxes for the richer members of society are necessary to best support public programs benefiting those who are underprivileged.

Check out our Inequality article to learn more!

Income Redistribution Strategies

When discussing income redistribution strategies, two strategies are often the ones brought up the most: direct and indirect.

Direct income redistribution strategies

As far as the near future is concerned, taxes and income redistribution to the disadvantaged people within a society are some of the most straightforward ways to lessen the amount of inequality and poverty that exist. While these are useful or considered as useful when economic growth benefits aren’t experienced by the poor, a majority of the time they’re not enough to make a significant impact. That’s why cash transfer projects have been used more often and have proven successful.

The catch with these projects is that they are conditional. They will provide funds for households in exchange for those households completing specific conditions such as ensuring their children have up-to-date vaccinations. One of the issues with these approaches is that their size is too small. What’s meant by this is that the amount that is currently available to be re-distributed to the people who need it is not enough to cover all of the households that need it. In order to make these programs even bigger, more resources are needed.

One of the ways that this could be solved is by increasing income taxes for those who are more upper class. Also, another way to make sure that there are enough funds is to better monitor higher income people to ensure that they’re not trying to get away with tax evasion.

It's also important to remember that whilst economic development raises average earnings, it is typically more successful in reducing poverty when income distribution from the start is more balanced or when it's combined with a reduction in inequality.

Indirect income redistribution strategies

If implemented correctly, income redistribution strategies will reduce poverty by reducing inequality. However, it may not significantly boost growth, besides potentially lowering social tensions caused by inequality. Direct investment in opportunities for the poor is critical. Transfers to the lower-class shouldn't only consist of money; they should also increase people's ability to earn income, immediately and later in life. Access to health care, water, energy, and transportation, as well as education, are all important When hardship strikes, social aid is vital in preventing individuals from sliding into poverty traps.

Learn more about what causes poverty traps in this article: Poverty Trap

Strategies that promote more equality and greater growth focus on gradually increasing resources and allocating them to services that support the poorest sections of the community in this or the future generation. Other approaches which do not depend on redistribution might accomplish similar results. However, prior to actually considering redistribution, governments should explore improving the pro-poor aspect or inclusivity of their economic growth strategy, particularly through increasing employment for unskilled individuals.

Having laws that dictate and set the minimum wage, while controversial due to the possible negative effects if the minimum wage gets to be too high, result in more fairness regarding the distribution of wages. Such initiatives may genuinely enhance labor productivity in underdeveloped economies.

Anti-discrimination legislation and lowering rent seeking are also some great ways to indirectly assist. Anti-discrimination legislation may help facilitate equality and development by enhancing employment and training opportunities for minority groups. And by lowering rent seeking, anti-corruption policies are likely to be the greatest options for boosting growth and increasing income equality, even though the imbalance caused by corruption is typically hard to detect.

Income Redistribution Examples

Let's go over two of the best known income redistribution examples within the U.S.

Food Stamps

Food stamps are funds given for food purchases to those whose earnings fall below the poverty threshold. They are funded by the government and managed by the states. Those who are eligible for food stamps get a card that they use that is refilled every month with a certain amount of money to assist that individual or family in acquiring food and non-alcoholic drinks in order to ensure that they have access to food and enough for a healthy diet.

AgePercentage
0-431%
5-1129%
12-1722%

Table 1. Percentage of school-age U.S. children participating in food stamp programs - StudySmarter.

Source: Center on Budget and Policy Priorities1

The table above shows what percentage of school-age U.S. children participate in food stamp programs every month, and that would otherwise most likely be hungry if not for the food stamps programs. As you can see, almost 1/3 of U.S. children under the age of 5 rely on programs like these in order to survive. This is a great assistance to parents as it helps them afford food for themselves and their children, and ensures that the kids have sustenance.

Medicare

Medicare is a U.S. government program that pays for healthcare services for persons 65 and older, those under 65 who meet certain conditions, and those with certain illnesses. There are four parts to it - A, B, C, D - and individuals can choose which parts they want. Many go with A as it is premium-free and there are no payments needed. Medicare itself is an insurance and therefore is used for medical purposes. People who are eligible for Medicare receive red, white, and blue cards in the mail that they are to hold onto.

income redistribution, medicare card, StudySmarterMedicare Card. Source: Wikimedia

Users don't have to pay for this like you would for regular insurance. Instead, costs for medical needs are covered by a trust that people who are covered have already put money into. In this way, it can be considered as income redistribution.

Income Redistribution Policy

One of the common political arguments against income redistribution policy is that redistribution is a trade-off between fairness and effectiveness. A government with substantial anti-poverty initiatives needs more money and, as a result, higher tax rates than one whose primary mission is to provide common services like defense spending.

But why is this trade-off bad? Well, it tends to imply that there should be a way to keep the costs of these programs down. One of the ways to do this is to only give the benefits to those who actually need them. This is done by something called a means testing. However, this causes an issue of its own.

Means tests are tests that conclude if a person or family is eligible to receive benefits.

Imagine the poverty line is $15,000 for a family of two. The Smith couple makes a total combined income of $14,000 so they are eligible to receive benefits worth $3,000 due to falling under the poverty threshold. One of them gets a raise at work and now the combined family income is $16,000. That's a good thing, right?

Wrong.

Since the combined family income is now over $15,000 the Smiths no longer are considered to be under the poverty threshold. Since they're not under the threshold, they're not eligible to receive benefits and they lose the $3,000 benefits they've been receiving. Before the raise, they had their combined income of $14,000 plus the $3,000 benefits for a total of $17,000 a year. After the raise, they only have the combined income of $16,000.

So while the raise seemed like a good thing, they're actually worse off now than they were before!

Income Redistribution Effects

Income redistribution effects result from the United States welfare state that has the function of redistributing money from a group of people to another group of people. The Census Bureau evaluates the impact of this redistribution in a report titled "The Effects of Government Taxes and Transfers on Income and Poverty" every year. One of the main things to remember about this study is that it checks out the immediate impacts of taxes and transfers, but doesn't take into account any behavioral changes the taxes and transfers may create. For example, the research makes no attempt to predict how many elderly U.S. citizens who are already retired would still be working if they weren't receiving retirement funds.

Income Redistribution Pros and Cons

Let's go over some of the pros and cons of income redistribution.

Pros of Income Redistribution:

  • It helps to even out a society's wealth or income distribution.

  • It has a broader impact on the economy as a whole, rather than just a few individuals.

  • Even those who don't work or can't work are guaranteed to have a way to support themselves enough to survive.

  • It can assist in bridging the wealth gap in nations with high inequality, when political and social conflicts or the emergence of populist regimes may be detrimental to long-term economic growth.

Cons of Income Redistribution:

  • Even if the underprivileged gain more access to funds, these individuals continue to lack the necessary skills, ambition, and relationships to compete successfully in the economy.

  • State and municipal taxes tend to be regressive, meaning that individuals with lower incomes end up giving a larger percentage of their income than those with higher incomes.

  • Since the poor have to pay higher tax if they work, they lose out on a large part of their redistribution money or funds. This in turn "penalizes" them from working and actually makes them more dependent on the funds given.

Income Redistribution - Key takeaways

  • Income inequality refers to how income is distributed unequally across a population.
  • Income redistribution is when income is redistributed throughout the society so as to lessen the income inequality that's present.
  • The two income redistribution strategies are: direct and indirect.
  • Food Stamps and Medicare are the best known examples of income redistribution.
  • The United States welfare state has the function of redistributing money.

References

  1. Center on Budget and Policy Priorities - SNAP Works for America’s Children. Percentage of school-age U.S. children participating in food stamp programs, https://www.cbpp.org/research/food-assistance/snap-works-for-americas-children

Frequently Asked Questions about Income Redistribution

It is when income is redistributed throughout the society so as to lessen the income inequality that's present.

An example of income redistribution is medicare and food stamps.

It narrows the gap between the poor and the wealthy

Higher taxes for the richer members of society are necessary to best support public programs benefitting those who are underprivileged.

The strategies are direct and indirect.

Final Income Redistribution Quiz

Question

Define poverty.

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Answer

Poverty is the state of being poor and not being able to afford basic needs.

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Question

Define anti-poverty program.

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Answer

An anti-poverty program is a program created to keep people from falling into poverty and to help those who are currently living in poverty.

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Define welfare.

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Answer

Welfare is financial aid that is given to poor, low-income families depending on their needs.

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Question

Define bank reform.

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Answer

Bank reforms are changes made within the banking system in order to improve it and confront any weaknesses.

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Question

Define tax credit.


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Answer

A tax credit is a certain amount of money that a taxpayer subtracts from the amount of money they owe the government.

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Question

Name at least 3 of the main anti-poverty programs used in the United States.

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Answer

  • SSI / Social Security
  • SNAP
  • WIC
  • Section 8
  • HeadStart
  • TANF 

Show question

Question

Who launched the New Deal?

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Answer

President Franklin D. Roosevelt launched the New Deal in 1933. 

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Question

What was the Great Depression?

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Answer

It was the most terrible economic drop in history as far as the developed world was concerned. It lasted 10 years from 1929-1939.

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Question

Who declared a "war on poverty" in 1964?

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Answer

President Lyndon B. Johnson declared a war on poverty in 1964 due to a high rate of unemployment. 

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Question

What was the EOA?

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Answer

The EOA, or the Economic Opportunity Act, was a bill created by President Lyndon B. Johnson that put more responsibility on the government to take a larger role in healthcare, education, and well-being of the people, especially those who are low-income. 

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Question

What act did President Bill Clinton pass in 1996? 

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Answer

The Personal Responsibility and Work Opportunity Act (PRWORA). The goal of this was was to change the way welfare was being used.

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What are the three main issues anti-poverty programs have?

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Answer

  • They're focusing on the wrong goal
  • The programs aren't sustainable
  • The issues are too specific

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What are the two strategies the US uses in order to assist those who are impoverished? 

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Answer


  • Giving those who are in poverty money directly

  • Providing those who are in poverty with services

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What's the largest anti-poverty program in the United States?

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Answer

Social Security is the largest anti-poverty program in the United States!

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Why are anti-poverty programs important?

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Answer

These programs are important because they help in the fight against poverty by recognizing and addressing the various parts that make up poverty.

Show question

Question

What's income inequality?

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Answer

Income inequality refers to how income is distributed unequally across a population.

Show question

Question

What's income redistribution?

Show answer

Answer

Income redistribution is when income is redistributed throughout the society so as to lessen the income inequality that's present.

Show question

Question

Why is redistribution of income a benefit to society?

Show answer

Answer

It narrows the gap between the poor and the wealthy

Show question

Question

What are means tests

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Answer

Means tests are tests that conclude if a person or family is eligible to receive benefits. 

Show question

Question

List at least one pro of redistribution

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Answer

  • It helps to even out a society's wealth or income distribution.

  • It has a broader impact on the economy as a whole, rather than just a few individuals.

  • Even those who don't work or can't work are guaranteed to have a way to support themselves enough to survive.

  • It can assist in bridging the wealth gap in nations with high inequality, when political and social conflicts or the emergence of populist regimes may be detrimental to long-term economic growth.

Show question

Question

What's at least one con of redistribution

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Answer

Cons

  • Even if the underprivileged gain more access to funds, these individuals continue to lack the necessary skills, ambition, and relationships to compete successfully in the economy.

  • State and municipal taxes tend to be regressive, meaning that individuals with lower incomes end up giving a larger percentage of their income than those with higher incomes.

  • Since the poor have to pay higher tax if they work, they lose out on a large part of their redistribution money or funds. This in turn "penalizes" them from working and actually makes them more dependent on the funds given.

Show question

Question

Who's responsible for redistributing funds?

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Answer

The United States welfare state has the function of redistributing money.

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Question

Income and poverty rates differ widely among and within specific categories of people (such as ___, sex, ______) and nations.

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Answer

age, ethnicity 

Show question

Question

Higher taxes for the ______ members of society are necessary to best support public programs benefitting those who are underprivileged.

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Answer

richer

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What's the catch with redistribution programs?


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Answer

They're conditional

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If done correctly, income redistribution will reduce poverty by reducing what?

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Answer

Inequality 

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Question

One of the common political arguments against income redistribution is that redistribution is a trade-off between ______ and _________.

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Answer

fairness, effectiveness 

Show question

Question

Economic development is typically more successful in _____ ______ when income distribution from the start is more balanced.

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Answer

reducing poverty

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Question

What does "The Effects of Government Taxes and Transfers on Income and Poverty" report not take into account?

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Answer

It doesn't take into account any behavioral changes the taxes and transfers may create.

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Question

What is one of the conditions that is usually set forth that one must complete/ensure before they're able to receive cash transfer payments?

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Answer

Ensure that their children have up-to-date vaccinations.

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What is the safety net?

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Answer

The safety net consists of a collection of government programs that are meant to provide temporary protection and assistance to people who are unemployed or lack an income. 

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What is the poverty trap?

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The poverty trap is a mechanism that makes it hard for the poor to escape poverty. 

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Why is it hard to escape the poverty trap?

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It is hard because government assistance is reduced as income increases. This means that even though a person is increasing their income, it is offset by their loss of government support.  

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Why do we have safety nets?

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We have safety nets to help those who are poor or have otherwise fallen on hard times maintain the minimum standard of living. 

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Are safety net programs meant for long-term or short-term assistance?

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Short-term.

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Who funds the safety net?

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The safety net is funded by the government and tax revenue.

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What are five types of safety nets?

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Five types of safety nets are non-contributory pensions, in-kind transfers, cash transfers, income tax credits, and school feeding programs.

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What is a non-contributory pension?

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These are pensions that are paid out by the government to those who qualify due to economic circumstances even though they did not contribute to them during their working time. 

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What is an in-kind transfer?

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In-kind transfers provide people with actual goods or services rather than giving them money. Governments tend to use in-kind transfers because it gives them more control over the aid they provide. 

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What is a cash transfer?

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A cash transfer provides the recipient with cash rather than goods or services. These are typically preferred by recipients since they are more versatile.  

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What are income tax credits?

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This is a tax break in the form of a tax credit for the working poor. The higher the income of the working poor the higher the tax credit is, up to a limit. It essentially increases the payment received for work.   

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What do school feeding programs do?

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These programs provide free or reduced lunches to school children attending public schools to ensure they receive adequate nutrition. 

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What was the first real safety net in the U.S. and what did it do?

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Answer

The first real safety net, the Social Security Act signed in 1935 and provided grants for states to fund unemployment benefits, dependent children, and public health. 

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What is SSI?

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Supplemental Security Insurance (SSI) provides income for those over 65 who qualify financially and those who are disabled as well as children. 

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What are WIC and SNAP?

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Answer

Both are nutritional assistance programs. The Special Supplemental Food Program for Women, Infants, and Children (WIC) is meant for women with children specifically, whereas the Supplemental Nutrition Assistance Program (SNAP) can be collected by anyone to purchase food.

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What is TANF?

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Temporary Assistance for Needy Families (TANF) is a federal program that provides states with funding for anti-poverty measures. 

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What is Medicaid?

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Answer

Medicaid is a federally funded healthcare program where the qualifications and parameters are set by each individual state. It is meant for low-income families and focuses especially on children, the elderly, and the disabled. 

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What is social welfare policy?

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Social welfare policy, implemented through some level of government, aims to protect citizens who may be considered poor, unemployed, unhealthy, or marginalized from their community.

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What is the main goal of social welfare policy?

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Answer

The main goal of social welfare policies is to provide a safety net of assistance programs to those who need support due to situations such as poverty, unemployment, poor health, disability, or other circumstances that we as a society have deemed unacceptable. 

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Question

What are some types of social welfare policies?

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Answer

some types of social welfare policies are food, housing, child care, medical care, and infrastructure.

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