“Original position” + “veil of ignorance” o Maxmin criterion – government should aim to maximize the wellbeing of the worst off person in society ▪ Maximum minimum utility, more egalitarian than utilitarianism o Social insurance – government policy aimed at protecting people against the risks of adverse events ● Libertarianism – government should punish crimes and violations of agreements but not redistribute income o Society itself earns no income – only individuals do
o Evaluates the process not the outcomes ▪ If income distribution arises unfairly then the government has a right to intervene ▪ But if the process is fair then the distribution is fair o Equality of opportunity is more important than equality of incomes o “What each person gets he gets from others in exchange for something” ● Policies to reduce poverty: o Minimum wage – depends on elasticity of labor demand o Welfare – government programs that supplement the incomes of the needy ▪ May create incentives for people to become needy ▪ There must be some need in addition to the poverty o Negative income tax – tax systems that collects revenue from high income households and subsidizes low income households ▪ Poor families receive assistance without any need ▪ Only qualification is low income ▪ EITC o In-kind transfers – provide people directly with the goods and services they need ▪ SNAP, Medicaid ▪ In-kind (inefficient, disrespectful) v cash (can be taken advantage of) ● Many policies have the unintended effect of discouraging the poor to escape their poverty o The programs are tied to income, creates culture of poverty o But a more gradual fade out of assistance increases the price of the programs ● Workfare – requires person taking benefits to take a government provided job ● Gov can only provide these programs to people for a limited amount of time, gets rid of culture of poverty ● Lorenz curve – graphical representation of the distribution of income or of wealth, diagonal line is perfectly equal, straight line up at the very end is perfectly unequal ● Gini coefficient – a measure of inequality, 0 is perfect equality, 1 is perfect inequality o A/A+B
● Why has income inequality risen recently? o Tech creates more demand for skilled labor o Globalization (trade and immigration) o De-unionization o Increase in divorce rates (more single parent households) o More women in the workforce (increased concentration of wealth) ● Countries that are less market based have less inequality ● Taxes will decrease inequality and lower the Gini coefficient ● Measures of poverty usually depends on family size, issues are: o Illness and disability may not be accounted for o Geographic location and cost of living o Ignores assets you have o Ignores in-kind transfers Quick note on Nash equilibria: ● Nash equilibrium – an equilibrium where no player has any incentive to change their action ● How to find Nash eq: o Look for a dominant strategy ▪
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