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Understanding Income Redistribution: Key Concepts and Evaluations

This document discusses the pivotal issues surrounding income redistribution, focusing on the distribution of income among households and the various methods to measure poverty, including the poverty line. It examines the implications of in-kind transfers, the role of utility functions in assessing social welfare, and critiques of theories like the maximin criterion by John Rawls. Furthermore, it highlights the need to evaluate the assumptions of economic models regarding income equality and the effectiveness of redistribution as a means to promote social stability and welfare.

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Understanding Income Redistribution: Key Concepts and Evaluations

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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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