redistribution - Redistribution 1 Equity a Horizontal...

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Redistribution 1. Equity a. Horizontal Equity–treat identical people identically b. Vertical Equity–treat worse off people better 2. Equity and efficiency a. Consider a Possibility Frontier which defines all the feasible situations for two people. b. Most government action we have thought about is getting you from inside the frontier to the frontier, or at least towards it. This is about efficiency . i. Eg, if there is an externality, you can make everyone happier by taxing the negative externality and giving away the proceeds appropriately. ii. If there is no insurance market because insurers are plagued by information problems, you can make everyone better off by forcing them to buy an insurance package. c. But, governments also move you along the frontier. This is about equity . d. For example, governments take money from people who have money and give it to people who don’t have money. i. This is redistribution . e. Sometimes, the frontier responds to redistribution. i. For example, if there is no redistribution, then the frontier on money in a pie-sharing game is linear (with a slope of -1). Either i have the pie or you have it. ii. If there is redistribution, then we might lose some pie as we move it from you to me (or vice versa). Thus, the frontier may be pulled inwards as we try to move more pie from one person to the other. iii.
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This note was uploaded on 09/13/2009 for the course ECONOMICS econ 104 taught by Professor Krishnapendakur during the Spring '09 term at Simon Fraser.

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redistribution - Redistribution 1 Equity a Horizontal...

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