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(Einkommensum-)Verteilung
Kapitel 3 (Einkommensum-)Verteilung (VL Theorie der WIPO WS 16/17 Prof. Dr. Thomas Wein)
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Kapitel 3 "Einkommens-(umverteilung)"
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Kapitel 3 "Einkommens-(umverteilung)"
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Kapitel 3 "Einkommens-(umverteilung)"
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VL WIPO, Prof. Dr. Thomas Wein
Welfare Economics Concerned with the social desirability of alternative economic states. WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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VL WIPO, Prof. Dr. Thomas Wein
Consumption Economy Edgeworth Box - an analytical device used to model welfare economic theory Depicts distribution of goods in a 2-good/2-person economy Pareto Efficiency – an allocation of resources such that no person can be made better off without making another person worse off Pareto Improvement – a reallocation of resources that makes at least one person better off without making anyone else worse off WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Edgeworth Box 2 person / 2 good economy
Eve r 0’ v w u Fig leaves per year At “v”, how many apples and figs do Adam and Eve consume? Box and dimensions initially set 1st click – place point v 2nd click – draw horizontal line uw 3rd click – draw vertical line xy s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Indifference curves in Edgeworth Box
Eve r A3 E1 0’ A2 E2 A1 E3 Fig leaves per year Box and dimensions initially set 1st click – Adam’s indifference curves 2nd click – Eve’s indifference curves s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Beginning at Point g, how to make Adam better off without Eve becoming worse off
Ap r 0’ Ah g Ag Eg h A Pareto Efficient Allocation Fig leaves per year p Box and dimensions initially set 1st click – “A Pareto efficient allocation” and arrow s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Beginning at Point g, how to make Eve better off without Adam becoming worse off
0’ Ag g Eg p Fig leaves per year Ep1 p1 Box and dimensions initially set 1st click – “A Pareto efficient allocation” and arrow A Pareto Efficient Allocation s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Beginning at Point g how to make both Adam and Eve better off
Ap2 r 0’ g Ag Eg Pareto efficient Pareto improvement Ep2 p Fig leaves per year p2 p1 Box and dimensions initially set 1st click – Box with Pareto efficient and improvement within s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Starting from a different initial point: Point k
Eve Ap2 0’ r g Ag Eg k p4 Ep2 p3 Fig leaves per year p p2 p1 Box and dimensions initially set 1st click – s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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VL WIPO, Prof. Dr. Thomas Wein
The Contract Curve Eve Ap2 r 0’ g Ag Eg The contract curve –locus of all Pareto efficient points p4 Ep2 p3 Fig leaves per year p p2 p1 Box and dimensions initially set 1st click – contract curve drawn from lower left to upper right and “The contract curve” and arrow appear s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Pareto Efficiency in Consumption
MRSaf = MRSaf Where MRS: -is the rate at which an individual is willing to trade one good for another -is the absolute value of the slope of an indifference curve Adam Eve WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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VL WIPO, Prof. Dr. Thomas Wein
Production Economy Analysis when supplies of 2 goods (applies and figs) are variable rather than fixed Production Possibilities Curve Graph to model production economy Maximum quantity of one output that can be produced given the amount of the other output WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Production Possibilities Curve
│Slope│ = marginal rate of transformation Fig leaves per year w y Axes and labels 1st click – PPC and labels 2nd click – lines x and w 3rd click – lines z and y C x z Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Marginal Rate of Transformation
MRTaf = Marginal rate of transformation of apples for fig leaves MRTaf = rate at which the economy can transform one good into another MRTaf = Absolute value of slope of Production Possibilities Frontier MRTaf = MCa/MCf WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Pareto Efficiency Conditions with Variable Production
Adam Eve MRTaf = MRSaf = MRSaf MCa/MCf = MRSaf = MRSaf Adam Eve WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Efficiency versus Equity
Eve Does society have to choose between p3 & q? r 0’ p3 Fig leaves per year q p5 Box and dimensions initially set 1st click – contract curve drawn from lower left to upper right and “The contract curve” and arrow appear s Adam Apples per year WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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VL WIPO, Prof. Dr. Thomas Wein
Utility Possibilities Curve Maximum amount of one person’s utility given each level of another person’s utility Adam’s utility U p3 p5 Axes and labels 1st click – Utility possibilities curve, p3 and p5 2nd click - q q U Eve’s utility WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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VL WIPO, Prof. Dr. Thomas Wein
Social Indifference Curve Society’s willingness to trade off one person’s utility for another’s W = F(UAdam, UEve) Adam’s utility Increasing social welfare Axes and labels 1st click – the arrow (speed: medium) and “Increasing social welfare” Eve’s utility WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Maximizing Social Welfare
If society values a more equitable distribution of goods - embodied in Social Indifference Curves, fairness and efficiency are possible (iii) Adam’s utility i iii ii Axes, labels, and social indifference curves 1st click – utility possibilities curve and points Eve’s utility WS 16/17 VL WIPO, Prof. Dr. Thomas Wein
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Nutzenmöglichkeitenkurve
US UJ Kapitel 3 "Einkommens-(umverteilung)"
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Simple Utilitarianism
Utilitarian Social Welfare Function: W = F(U1, U2, ,,,, Un) “Promote Greatest Good for Greatest Number” Additive Social Welfare Function W = 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 Review General Concept of Social Welfare Function Utilitarianism simply means W a function of people’s utility Conventional Welfare Economics posits W = F(U1, U2, …, Un), but this so general it doesn’t tell us much Utilitarian's believed in additive welfare function, although W = F( ) is called a utilitarian welfare function Kapitel 3 "Einkommens-(umverteilung)" 24
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Implications for Income Inequality
This is the net gain to society Paul gains this much utility Paul’s marginal utility Peter’s marginal utility e f Peter loses this much utility d c MUPeter Take ab from Peter and give to Paul Social welfare maximized MUPaul Paul’s income Peter’s income 0’ a b I* Paul’s income Peter’s income Kapitel 3 "Einkommens-(umverteilung)" 25
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Evaluating the Assumptions
Kapitel 3 "Einkommens-(umverteilung)" 26
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Kapitel 3 "Einkommens-(umverteilung)"
The Maximin Criterion Social Welfare Function W = Minimum (U1, U2, …, Un) Maximin criterion - No inequality acceptable unless it works to the advantage of the least well off Original position – “behind the veil of ignorance” Critique of Rawls Only important consideration is the utility of the least well-off member. Society’s objective is to maximize the utility of the person with the least utility. This implies there should be complete equality except to the extent that departures from equality increase the welfare of the worst-off person. No inequality acceptable unless it works to the advantage of everyone. Original position – “behind the veil of ignorance” – people will adopt maximin because of the insurance it gives against disastrous outcomes Criticisms Should decision made in original position have any special claim to ethical validity Are people really that risk adverse? It can lead to some weird outcome. “A new opportunity arises to raise the welfare of the least disadvantaged by a slight amount, but almost everyone else must be made substantially worse off, except for a few individuals who would become extremely wealthy.” Because all that is relevant is the welfare of the worst-off person, the maximin criterion indicates that society should take advantage of the opportunity Kapitel 3 "Einkommens-(umverteilung)" 27
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Pareto Efficient Income Redistribution
Will redistribution always make someone worse off? Utility Function Ui = F(X1, X2, …, Xn, U1, U2, …, Ui-1, Ui+1, …, Um) Redistribution if gain in utility from charity exceeds loss from reduced consumption Government reduces cost of redistribution Income distribution as a Public Good Social safety net Social stability Assumption that utility depends on your income only implies that al redistribution must hurt at least one person so redistribution can never be a Pareto improvement. If we assume that utilities depend not only on their own income, but those of others, then redistribution can be a Pareto improvement. Kapitel 3 "Einkommens-(umverteilung)" 28
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Non-individualistic Views
Fundamental principles specifying income distribution derived independent of tastes Incomes distributed equally as matter of principle Plato’s 4:1 ratio of highest to lowest income Commodity Egalitarianism Some argue specification of income distribution should be derived from a set of principles that are independent of people’s tastes. Nonutilitarian approach Commodity Egalitarianism – James Tobin – certain types of commodities are so important that they should be distributed equally (less unequally than ability to pay for them) – basic necessities of life, health citizenship Kapitel 3 "Einkommens-(umverteilung)" 29
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Kapitel 3 "Einkommens-(umverteilung)"
Other Considerations Processes versus Outcomes Fairness of distribution of income judged by fairness of process that generated it Robert Nozick Society cannot redistribute income because society has no income to redistribute Mobility Corruption Kapitel 3 "Einkommens-(umverteilung)" 30
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Expenditure Incidence
Relative price effects Public goods Valuing in-kind transfers Kapitel 3 "Einkommens-(umverteilung)" 31
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Kapitel 3 "Einkommens-(umverteilung)"
In-Kind Transfers H Other goods per month 420 E3 340 A F U 300 E1 260 B D 20 60 Kapitel 3 "Einkommens-(umverteilung)" 150 210 Pounds of cheese per month 32
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Kapitel 3 "Einkommens-(umverteilung)"
In-Kind Transfers H Other goods per month 420 A F 300 E5 168 E4 136 B D 82 Kapitel 3 "Einkommens-(umverteilung)" 126 150 210 Pounds of cheese per month 33
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Reasons for In-Kind Transfers
Commodity egalitarianism Reduce welfare fraud Political factors Kapitel 3 "Einkommens-(umverteilung)" 34
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Literaturhinweise Rosen, H.S./Gayer, T. (2008), Public Finance, Boston et al. (McGraw-Hill), 8th. edition, chapter 12. Nicholson, Walter/Snyder, Christopher/Luke, Peter/Wood, Michael (2008), Intermediate Microeconomics, London (Cengage Learning, S Kapitel 4 “NPÖ"
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