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Questions/ Comments . Midterm Answer Key Q3 Evaluations Office Hours: Monday and Wednesday 4:30PM-5:30PM. CHAPTER 12. INCOME REDISTRIBUTION: CONCEPTUAL ISSUES. The Distribution of Income Among Households. Income Distribution. Important? Economists vs. Policy Makers. Who is Poor?.

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  1. Questions/ Comments • Midterm Answer Key • Q3 • Evaluations • Office Hours: Monday and Wednesday • 4:30PM-5:30PM

  2. CHAPTER 12 INCOME REDISTRIBUTION: CONCEPTUAL ISSUES

  3. The Distribution of Income Among Households

  4. Income Distribution • Important? • Economists vs. Policy Makers

  5. Who is Poor?

  6. Measuring Poverty • Poverty Line • A fixed level of real income considered enough to provide a minimally adequate living. • $18,400 in 2003 • Cost for Basket of Goods (Adjusted for Inflation) • Basket Does Not Change! • New Basket in 2000 • 120% Increase

  7. Poverty Rate (1960-2004)

  8. Interpreting the Distributional Data • Taxes Ignored • Annual Income • Cyclical • Consumption Data • Units of Observation • Households • Census = Cash Receipts • Ignores in-kind transfers • Decrease 12.7% to 8.3%

  9. Nonindividualistic Views • Income Distribution is Personal Preference • Incomes distributed equally as matter of principle • Commodity Egalitarianism • In-Kind Transfers

  10. Expenditure Incidence • Relative Price Effects • More Expensive? • Public Goods Problem • Values • Valuing In-Kind Transfers • $1 Spent by Gov = $1 to BC?

  11. In-kind Transfers H 420 Other goods per month E3 340 A F U 300 E1 260 B D 20 60 150 210 Pounds of cheese per month

  12. In-kind Transfers H 420 Other goods per month A F 300 E5 168 E4 136 B D 82 126 150 210 Pounds of cheese per month

  13. Reasons for In-Kind Transfers • Commodity Egalitarianism • Reduce Welfare Fraud • Lying for Cash • Political Factors • Help Specific Industries

  14. 0 Simple Utilitarianism • Utilitarian Social Welfare Function:W = F(U1, U2, ,,,, Un) • “Promote Greatest Good for Greatest Number” • Additive Social Welfare FunctionW = U1 + U2 + … + Un • Assume • Individuals have identical utility functions that depend only on their incomes • Utility functions exhibit diminishing marginal utility of income • Total amount of income is fixed

  15. 0 Implications for Income Inequality Paul’s marginal utility Peter’s marginal utility e f d c MUPeter MUPaul 0 0’ b a I* Paul’s income Peter’s income

  16. 0 Implications for Income Inequality Paul’s marginal utility Peter’s marginal utility e f d c MUPeter MUPaul 0 0’ b a I* Paul’s income Peter’s income

  17. 0 Implications for Income Inequality Paul’s marginal utility Peter’s marginal utility e f d c MUPeter MUPaul 0 0’ b a I* Paul’s income Peter’s income

  18. 0 Implications for Income Inequality Paul’s marginal utility Peter’s marginal utility e f d c MUPeter MUPaul 0 0’ b a I* Paul’s income Peter’s income

  19. Further Evaluation • Perfect Equality is Best • Examine Assumptions

  20. Further Evaluation • Examine Assumptions • Individuals have identical utility functions that depend only on their incomes • Your Utility? • My Utility vs. Your Utility? • Ethics

  21. Further Evaluation • Examine Assumptions • Utility functions exhibit diminishing marginal utility of income • True for Goods • True for Income?

  22. Further Evaluation • Examine Assumptions • Total amount of income is fixed • Redistribution Distorts

  23. The Maximin Criterion • John Rawls Social Welfare Function W = Minimum(U1, U2, …, Un) • Original position • “behind the veil of ignorance” • Maximin Criterion • No inequality acceptable unless it works to the advantage of the least well off.

  24. The Maximin Criterion • Critique • Original Position • Risk Adverse? • Strange Outcomes • Help Poor • Benefit Rich • Hurt Everybody In Between

  25. Pareto Efficient Income Redistribution • Pareto Efficient Redistribution • a reallocation of income that increases (or does not decrease) the utility of all consumers. • Possible? • Utility Function • Ui = F(X1, X2, …, Xn, U1, U2, …, Ui-1, Ui+1, …, Um) • Charity > Reduced Consumption

  26. Pareto Efficient Income Redistribution • Government Reduces Cost of Redistribution • Income Distribution as a Public Good • Social Safety Net • Social Stability

  27. Other Considerations • Processes versus Outcomes • Process Fair? • Outcome Fair • Mobility • Corruption

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