copyright © by houghton mifflin company. all rights reserved. 1 redistributing income in theory...
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Redistributing Income in Theory• Utilitarian model of redistribution.
• Assume that each individual’s utility u is a function of money income m: u=u(m).
• Maximize total utility of all persons in society.
• W = ui(mi).
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Utilitarian Model of Redistribution
• Optimization leads to the requirement that marginal utilities for all persons must be equal.
• In the two person case:
• Mua = MUb
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Figure 5.2: An Equal Distribution of Income
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Figure 5.3: An Unequal Distribution of Income
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Figure 5.4: Optimal Income Distribution When People Are Different
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Figure 5.5: Social Welfare Function Contours When Individuals’ Utilities Are Perfect Substitutes
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Figure 5.6: Social Welfare Function Contours
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Figure 5.7: Social Welfare Contours in the Rawlsian Case
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Figure 5.8: Social Welfare Maximization