Chapter_12_v2

Chapter_12_v2 - Part 3 Public Expenditure: Social Insurance...

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Part 3 – Public Expenditure: Social Insurance and Income Maintenance Chapter 12 – Income Redistribution: Conceptual Issues 1. Utilitarianism suggests that social welfare is a function of individuals’ utilities. Whether the rich are vulgar is irrelevant, so this part of the statement is inconsistent with utilitarianism. On the other hand, Stein’s assertion that inequality per se is unimportant is consistent with utilitarianism. 2. a. To maximize W, set marginal utilities equal; the constraint is I s + I c = 100. So, 400 - 2I s = 400 - 6I c , substituting I c = 100 - I s gives us 2I s = 6 (100 – Is). Therefore, I s = 75, I c = 25. b. If only Charity matters, then give money to Charity until MU c = 0 (unless all the money in the economy is exhausted first). So,400-6 I c = 0; hence, I c = 66.67. Giving any more money to Charity causes her marginal utility to become negative, which is not optimal. Note that we don’t care if the remaining money ($33.33) is given to Simon or not. If only Simon matters, then, proceeding as above, MU s. 0 if I s = 100; hence, giving all the money to Simon is optimal. (In fact, we would like to give him up to $200.) c. MU s = MU c for all levels of income. Hence, society is indifferent among all distributions of income. 3. Suppose the government is initially providing an in-kind benefit of 10 units of free public transportation, worth $2 each, so the cost of the subsidy is $20. Without the subsidy, income is $40. With no subsidy, the consumer maximizes utility at point A, and with an in-kind benefit of 10 units of free public transportation, the consumer maximizes utility at point B. A cash subsidy equal to $20 would allow the consumer to reach point B as well, so the government could convert an in-kind subsidy valued at $20 to a cash subsidy of $20 and leave people equally well off.
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Chapter_12_v2 - Part 3 Public Expenditure: Social Insurance...

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