week4 - VI. INCOME DISTRIBUTION A. Overview. 1....

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VI. INCOME DISTRIBUTION A. Overview. 1. Conservative opposition to “Big Government” is often opposition to income redistribution. a. Government often redistributes income explicitly through tax system and income support programs. b. Side effect of other policies is redistribution of income. 2. $64,000 question: should the government redistribute income? 3. Latest figures: a. Top 1/5 of income distribution gets 53% of all income; bottom 1/5 gets less than 5%. b. While relatively stable, inequality has grown lately. (Big question for labor economists and others: why has income disparity grown?) c. Poverty rates higher among minorities, which raises problems for U.S. system of government. B. Views on the role of government. 1. Utilitarian social welfare function: welfare of society determined by how well off are its members – i.e., conventional welfare economics. a. Redistribute income as long as it improves total welfare. b. Following must hold: 1) Welfare function is additive. 2) Every one has same utility function. 1
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3) Utility functions have diminishing marginal utility. 4) Total income is fixed. c. Implies would redistribute income until all income is equal. d. 2 is impossible to determine, 3 may not be true, and 4 clearly not true and is affected by policy – redistribution of income may reduce total output. 2. Maximin criterion: objective is to maximize the utility of the person with the minimum utility. a. Also implies equal distribution of income. b. John Rawls and ‘original position’: is it ethical? 1) Why is the view from the original position the ethical one? 2) What about the role of risk? c. Possible perverse outcome: change in distribution that helps the very poor, makes everyone in the middle much worse off, and helps the very rich may not be desired, but it would meet the maximin criterion. 3. Pareto efficient: the rich get utility from helping the poor; i.e., not made worse off by giving up some money. a. Key point: income distribution as a public good: utility is affected by income distribution. b. Not just altruism: 1) Purchase stability – i.e., preserve the social contract. 2) Insurance against becoming poor yourself. 4. Non-individual views. 2
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a. Social welfare not derived from individual’s utility, but what a good society requires.
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This note was uploaded on 06/30/2009 for the course ECON 103 taught by Professor Sandrablack during the Fall '07 term at UCLA.

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week4 - VI. INCOME DISTRIBUTION A. Overview. 1....

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