How does society select a point along the utility

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How does society select a point along the utility possibilities curve?Just as indifference curves for individuals describe how they make trade-offs between differentgoods; social indifference curves describe how society might make trade-offs between utility levels ofdifferent individuals.A social indifference curve gives the combinations of utility of, say, Crusoe and Friday, between whichsociety is indifferent.ExampleSuppose society decides to move, say, from point A to point B along the utility possibilities schedule,representing an increase in Friday’s utility and a reduction in Crusoe’s utility. The first question is:What is the trade-off? The utility possibilities curve gives the answer by showing the increase inFriday’s utility fromU0F¿U1Fthis decreases courses curve fromU0C¿U1C
The second question concerns social preferences: How does society evaluate the trade-off? Theslope of the social indifference curves gives the trade-offs for which society is indifferent. Point B ison the social indifference curve S1, which is tangent to the utility possibilities curve, and lies on ahigher indifference curve than S0. Point B is therefore preferred by societyDetermining the Trade OffsThe shape of the utility possibilities schedule tells us something more about those trade-offs. Asdepicted in the figure, the decreases in Crusoe’s utility are small in comparison to the increases inFriday’s utility.
Utility theory helps explain this outcome.Economists use the term utility function to describe the relationship between the number of orangesand Friday’s level of utility;the extra utility Friday gets from an extra orange is called his marginalutility.Notice that as more oranges are consumed, utility rises more slowly, and marginal utilityfalls.
Transferring resourcesUtility curve shapeA second important determinant of the shape of the utility possibilities schedule is the efficiencywith which we can transfer resources from one individual to another.In our society, the way we transfer resources from one group (say, the rich) to another (say, thepoor) is by taxing the rich and subsidizing the poor. The way we do that normally interferes witheconomic efficiency.The red linerepresents the utility possibilities schedule assuming that itis costless to transferresources.The black line,which lies far below the previous locus, except at point C—the point that occurswithout any redistribution—represents the schedule when transfers are very costly.The set of points we can achieve through redistribution, when transfers are costly, lies within theutility possibilities curve, given costless transfers.Evaluating the Trade OffsWelfare functionThe second basic concept used in analysing social choices is the social indifference curve. The socialindifference curve is defined as the set of combinations of utility of different individuals (or groups ofindividuals)that yields equal levels of welfare to society—for which, in other words, the socialwelfare function has the same value.

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