Rationale of income

redistribution
(Conceptual Issues)
Rosen
Public Finance, ed 7th
Chapter 7
 GOVERNMENT ROLE
1. KEEP THE MARKET EFFICIENT THROUGH
EFFICIENT ALLOCATION
2. INCOME REDISTRIBUTION

ASSESSING INCOME DISTRIBUTION BY

DETECTING POVERTY LINE
 MEASURING INCOME
DISTRIBUTION
O Census income data consist only family cash
receipt but omit in kind transfer
O Income data usually before tax
O Income measured annually
O Low income earner is daily paid
O High income earner is undated
O Defining unit of observation
O living together is more economies
RATIONALE OF INCOME
REDISTRIBUTION
1. SIMPLE UTILITARIANISM
2. MAXIMIN CRITERION
3. PARETO EFFICIENT INCOME
REDISTRIBUTION
4. NONINDIVIDUALIST TIC VIEWS
SIMPLE UTILITARIANISM
O Utilitariansm social welfare function:
O U= f(U1, U2, … Un)
O Assumed that an increase in any Ui’s, other
things being constant, then Welfare
increase. A change that make someone
better off without making anyone worse off
increase Social Welfare.
O An additive Social Welfare Function
O W= U1 + U2 + …+ Un
O The redistribution of income increase utility
of any one such that welfare increase
O This function assume that
1. Individual have identical utility function
2. Utility function exhibit Diminishing MU of
income
3. Total Amount of income available is fixed.
O Gov’t should redistribute income to obtain
complete equality
 Model of optimal distribution
of income
Utility increase= U paul
increase + U Peter
MU

Peter’s
Paul’s

0 a b I O’
 MAXIMIN CRITERION
O Social welfare depend only on the utility of
the person who has the lowest utility
O W= min(U1, U2,…Un)
O Maximin criterion:
O Maximize the utility if the person with the
minimum utility
However, taxing the rich may cause the poor to
loose their jobs
PARETO EFFICIENT INCOME
REDISTRIBUTION
O Both additive and maximin criterion make
some better off but others worse off
O In Pareto : making some better without
making others worse off. Especially when
altruism exist, an increase in Utility of giving
to others may outweigh the loss of utility of
redistributing the income.
NON-INDOVIDUALIST VIEW
O Income should distribute equally because
inequality is bad for society.
O Less extreme proposal
O Commodity egalitariasnism