What are transfer payments?

Transfer payments refer to payments made by the government to individuals or groups without any exchange of goods or services. These payments are typically designed to provide financial assistance or support to those in need, such as welfare benefits, unemployment compensation, and social security payments. The core characteristic of transfer payments is that they do not involve a reciprocal arrangement or transaction; instead, they serve to redistribute wealth within the economy.

This understanding contrasts with payments made in exchange for goods and services, which are transactional and involve a direct economic exchange. Similarly, subsidies aimed at encouraging production are incentives provided to businesses to enhance their output and are tied to specific economic activities. Tax deductions also differ, as they relate to adjustments in taxable income rather than direct cash payments. Therefore, the definition of transfer payments is clearly aligned with the option that describes them as payments made where no goods or services are exchanged.