Governments can redistribute income partly through transfer payments, which differ from payments made in exchange for producing a good or service. Which of the following is an example of a transfer payment?

AS Level Economics 9708: Identifying a Transfer Payment

Step 1: Recall what a transfer payment is

A transfer payment is a payment made by the government to an individual for which no good or service is supplied in return. It transfers purchasing power from taxpayers in general to the recipient, rather than being a reward for producing anything.

Step 2: Check option B

A state retirement pension is paid to someone who is no longer working and therefore is not supplying any labour in return for the payment. It is simply a transfer of income from the government (funded by taxpayers) to the pensioner. This fits the definition exactly.

Step 3: Rule out A, C and D

Option A is a wage, a factor payment made in return for labour actually supplied by the civil servant. Even though the payer is the government, it is not a transfer payment because a service (labour) is provided in exchange.
Option C is a dividend, a factor payment that rewards shareholders for the capital they have invested in the company. Again, something (capital, and the risk-bearing that goes with it) is supplied in return.
Option D is a market payment for a service actually performed (repairing a boiler), not a transfer payment, and it does not even involve the government.

Final answer

Option B. A state retirement pension is a transfer payment because it is paid with no good or service supplied in return; A, C and D are all factor or market payments made in exchange for labour, capital or a service.