Lecture+25+December+7

Lecture+25+December+7 - Todays agenda Tradeoffs in income...

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Today’s agenda Tradeoffs in income redistribution The case for market allocation revisited: A second look at the Fundamental theorem of welfare economics Remedies for market failures
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Negative income tax Earnings Benefits paid Total income 0 6,000 3,000 5,000 8,000 4,000 10,000 9,000 12,000 2,000 14,000 15,000 1,000 16,000 18,000 0
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Negative income tax Guarantee = benefit paid at zero earnings Break-even level = earnings at which benefits reach zero Tax rate = reduction in benefits caused by a $1 earnings increase
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Negative income tax After-tax income Before-tax income 45 I BE = Break-even income Guar- antee level Slope = 1 - t
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Negative income tax After-tax income Before-tax income 45 I BE = Break-even income Guar- antee level Slope = 1 - t I G( 1 t ) I I Gt I 0 G I G I posttax BE = +− = −= = = I t t pretax
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Negative income tax Guarantee = benefit paid at zero earnings Break-even level = earnings at which benefits reach zero Tax rate = reduction in benefits caused by a $1 earnings increase Guarantee = Tax rate x Break-even level
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Negative income tax Guarantee = benefit paid at zero earnings Break-even level = earnings at which benefits reach zero Tax rate = reduction in benefits caused by a $1 earnings increase Guarantee = Tax rate x Break-even level Want Small
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Negative income tax Guarantee = benefit paid at zero earnings Break-even level = earnings at which benefits reach zero Tax rate = reduction in benefits caused by a $1 earnings increase Guarantee = Tax rate x Break-even level Want Small Want Small
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Negative income tax Guarantee = benefit paid at zero earnings Break-even level = earnings at which benefits reach zero Tax rate = reduction in benefits caused by a $1 earnings increase Guarantee = Tax rate x Break-even level Want Large Want Small Want Small
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Equality v . efficiency Total amount of income in society depends on how we attempt to redistribute it. Tradeoff between equality and efficiency Optimal income distribution must involve a degree of inequality. Efficiency cost of redistribution does not make it undesirable.
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Pareto efficiency Pareto efficiency : no feasible reallocation of inputs or outputs would make someone better off without making someone worse off. If the allocation of resources is Pareto efficient, then it is impossible to make everyone better off.
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Necessary conditions for Pareto efficiency Need to distribute output so no consumer can be made better off without making another worse off Need to be on the PPC Need to be at the right point on the PPC Butter Guns
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First efficiency requirement: Distribute produced goods optimally “Distributive efficiency” Distribute output so no consumer can be made better off without making another worse off Need: MRS AB me = MRS AB you
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First efficiency requirement: Distribute produced goods optimally “Distributive efficiency” Distribute output so no consumer can be made better off without making another worse off Need: MRS AB me = MRS AB you B A B A Me You
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Lecture+25+December+7 - Todays agenda Tradeoffs in income...

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