# 18 - CHAPTER 17 POVERTY INEQUALITY AND DISCRIMINATION 1 2 3...

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C HAPTER 17 P OVERTY , I NEQUALITY , AND D ISCRIMINATION 1. Students will have different responses to this question. It would be interesting to collect the responses and calculate their distribution. 2. There can be many choices. If the tax rate is constant, then the break-even income level will be equal to the guaranteed income level divided by the tax rate. 3. To construct the Lorenz Curve for Disneyland, note that there is \$400,000 of total income, distributed as follows: Share of Income Cumulative Share (percent) (percent) Lowest 20% (ticket taker) 4 4 Second 20% (Pluto) 11 15 Third 20% (Minnie Mouse) 17 32 Fourth 20% (Donald Duck) 25 57 Highest 20% (Mickey Mouse) 43 100 The Lorenz Curve is shown in Figure 17-1; it is quite similar to the Lorenz Curve for the United States: FIGURE 17-1

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4. The two curves show a growing income inequality since 1980. 5. Although students will have a variety of answers, a relative concept of poverty almost certainly makes more sense. A relative concept of poverty says that the poor are those who fall too far behind the average income. 6. One could think of output and equality as two goods that can be bought. If one knew their relative costs and the relative utility associated with each, then one would purchase good A (equality) until the point at which its marginal cost was just equal to the marginal utility of good B (output) that is being given up. In fact, there are many practical, and even theoretical, problems inherent in making such a calculation. First, we do not really know what the trade-off between equality and output is, so we cannot determine their relative costs. Second, we do not know how much benefit each gives us. More fundamentally, we each may have different assessments of the benefits from each, and it is impossible to aggregate these assessments. One would not be surprised, for example, to learn that a currently poor person puts a higher value on equality than does a currently rich person. 7. The distribution of income in the United States has indeed grown more unequal since the 1970s. A flat tax would be less effective in reducing inequality than would a progressive income tax, since people with the top incomes would pay (almost) the same tax rate as people in the middle. If low incomes are exempted, the flat tax could have some progressive effect. One argument in favor of the flat tax is that it would promote efficiency by eliminating loopholes and lowering the marginal tax rate; if so, the tax would be an example of the trade-off between equality and efficiency: sacrificing equality for the sake of efficiency.

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C HAPTER 18 L IMITING M ARKET P OWER : A NTITRUST AND R EGULATION 1. Electric companies and telephone companies usually have declining average costs as more customers are added and more use is made of their services. A large part of the costs are fixed, in the form of the distribution network. It would be wasteful to add a second or third distribution network that covers the same routes as the first. Costs to consumers would have to rise. So a
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## This note was uploaded on 04/14/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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18 - CHAPTER 17 POVERTY INEQUALITY AND DISCRIMINATION 1 2 3...

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