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Econ Ch 12
Redistribution
| Question | Answer |
|---|---|
| Is the correct distribution of income a normative concept or positive concept? | Normative |
| What is a normative concept? | Moral statement, depends upon the value, judgements, and subjective notions of fairness of the individual |
| Income | Flow of money earned by an individual during a period of time (weeks/months), comes from “selling” labor, natural resources or capital in the market for FOP |
| Wealth | ? Current stock of money and other valuable assets net of debt that has been accumulated by an individual to a particular point in time, comes from saving, capital gains, and debt retirement |
| Difference between income and wealth | Income is a period of time, and wealth is a point in time. Wealth is focused on stock and assets. Income is focused on the flow of money |
| Similarities between income and wealth | They each look at the individual and use time as a factor. Both reference money |
| What is one of the most important factors that determine whether someone is willing to support redistribution of income? . | Their support depends on whether they think levels of income/wealth are the result of decisions by individuals or the result of luck/socio-economic factors beyond the control of the individuals. |
| Discuss whether poverty is due to factors under the control of the poor person or not. | Poverty is more due to factors under control because people abuse systems like welfare and they aren’t as effective as they could be |
| What factors contribute to differences in income between people? | Natural talent, ability, acquired skills, training, work experience, education, effort, health, location, compensating differentials, luck, immigration, technological change |
| Discuss differences in people | Natural ability, talent, skill, upbringing, health |
| Discuss differences in jobs | Experience, requirements, reputation |
| Discuss economic conditions or market factors | Market supply/demand, compensating differentials (differences in labor market wage rates due to differences in working conditions), tech change (increase in outputs through process of invention, immigration (origin from/if they brought money), and luck |
| How do we measure Income Inequality? | Lorenz curve |
| Lorenz Curve | Measures the cumulative percent of a groups income as a fraction of the population. The more “bowed out” the curve, the more income inequality |
| What does the 45* line represent? | If everyone in society had the exact same income, “line of perfect equality” |
| How do you plot the points of the Lorenz curve on the graph? | Percentiles of the population on the horizontal axis according to income or wealth |
| Why doesn’t the Lorenz curve fall perfectly on the 45* line? | Income isn’t all equal or perfect |
| What is the Gini Coefficient, and how is it measured? | Ratio of the lens shaped area between the Lorenz Curve and the 45-degree line to the entire area below the 45-degree line. |
| How is the area between the 45* line and the Lorenz curve related to the Gini Coefficient? | Ratio of the lens-shaped area between the Lorenz Curve and the 45 degree line factors into the equation (that ratio to the entire area below the 45 degree line) |
| Can the Gini Coefficient be greater than 1? Can it be less than zero (or negative)? | No. No. Runs from 0-1 where 0 is perfect income equality and 1 is perfect income inequality |
| Using Mean Household Income, which 1/5 of the population has not seen an increase in income since the 1970’s? Which has seen the strongest increase in income? | Bottom 5th, top 5th |
| What is the “War on Poverty”? | Declared by President Lyndon B. Johnson. He established the Economic Opportunity Act, Food Stamp Act, Elementary and Secondary Act, and Social Security Act |
| When did war on poverty start? | January 8th 1964 |
| Who started war on poverty? | President Lyndon B Johnson |
| What are some of the programs started during war on poverty? | Economic Opportunity Act, Food Stamp Act, Elementary and Secondary Act, and Social Security Act |
| How much is spent every year on welfare programs as a % of GDP? | 5.3% |
| Poverty | Condition of having very limited access to goods and services |
| Poverty threshold | Income levels below which the household is deemed to be living in poverty |
| How much was poverty threshold for a family of 4 in 2015? | 20250 |
| Poverty rate | The percentage of the population living below the poverty line |
| What is the poverty rate for the U.S. in 2014? | 14.8 |
| Name some common household items for which the poor today have a higher ownership rate than the average of the population in 1950 had. | Quality of housing, food, health care, consumer products, entertainment, communications, and transportation |
| Arguments for coercive resdistribution | (social justice), utilitarian justice, Rawlsian justice, labor theory of value |
| Arguments against coercive redistribution | (natural rights), libertarian justice, property rights |
| Redistribution | Refers to government policies designed to alter the levels of income or consumption of households within a society |
| Utilitarian justice | Which posits that total social welfare can be increased by transferring income/wealth from the rich to the poor, so long as people have a diminishing marginal utility for money. |
| Who founded utilitarian justice? | Jeremy Bentham and John Stuart Mill |
| What is the goal of utilitarians? | Better society through actions that benefit all. |
| Diminishing Marginal Utility of Income | As income increases, total benefit increases, but at a diminishing rate |
| How does transferring income from rich to poor increase society’s total utility? | The rich wouldn’t be using the money, but the poor would use the money in which the society’s total utility is increased. |
| Doesn’t the tax on the rich reduce their utility by the same amount that the poor receiving the transfer gain in utility? | Not necessarily we don’t know what everyone is doing with the money and what it means to them. |
| Rawlsian Justice | Version of social justice theory that claims each individual has entered into a contract with the other members of society in order to create civilized life. They surrender some natural rights to gain the benefit of civilization |
| Who founded Rawlsian Justice? | John Rawls |
| What is the goal of Rawlsians? | To have some ease of mind that even the worst output isn’t so bad. They want to benefit outcomes of society. |
| What is the Maximin Criterea, and how does it apply to the goal? | Aiming to maximize the utility of the worst off person in society. Applies to the goal because it would benefit the outcomes of society and make the worst outcome not as bad as it could be. |
| Why does Rawls believe that all rational people would agree to his redistribution plan if they were behind a “Veil of Ignorance”? H | He believes that if everyone knew what they'd be born into, they would agree to the plan due to risk aversion. Rational self interested people would want to make sure the worst outcome didn’t happen to them. |
| What is this the veil of ignorance? | Moral reasoning device created to force impartial decision-making by hiding information that would create bias |
| Contrary to Rawls’ assertion that every rational person would want to apply the Maximin Criterion, what example shows that under certain income distributions people may not? | If there were options of higher income in one group versus another |
| Marx’s Labor Theory of Value | The entire value of good that is sold in a market system is due to labor used in production. Neither capital nor land winders have any moral right to benefit from product of workers. Says redistribution is morally okay and mandatory. |
| Does it support redistribution from the capitalist class to the working class? How much redistribution would be appropriate? 10%, 50%, or 100% of the capitalist’s income and wealth? | Yes, 100% |
| Is Marx’s analysis correct about the Capitalist class deserving no income due to making no contribution to production? | No |
| Arguments against redistribution | Libertarian justice |
| Libertarian Justice | Natural Rights. Posits that distribution of income is morally irrelevant as long as procedures for distribution are morally just. Gov should do nothing more than act as referee and punish violators of property rights/contracts |
| Who relates to libertarian justice? | Robert Nozick |
| Explain using Natural Rights theory based on property rights and contract. | Gov should do nothing more than act as referee and punish violators of property rights/contracts as long as procedures are morally just. |
| Free rider problem | People piggyback off the contributions of others |
| Why is free riding considered a problem if some people don’t voluntarily give to charity to reduce income inequality? | Charities don’t receive enough donations due to people not donating because they ride off somebody else’s contribution |
| Does this problem assume that people are against charity for the poor, and that is why they are not contributing? | No, it assumes that people are free riding |
| How can redistribution cause a lowering of work effort or other efforts to better oneself economically? | If the government redistributes too much from higher income to lower income then the incentive to work hard and study hard are diminished, leading to lower overall levels of productivity and income |
| Can government redistribution “crowd-out” private charity? | If gov funds charities, they wont be able to fund private charities |
| Redistribution Policies | in kind and income support |
| Redistribution In-Kind | Gov transfers a good/service to poor to increase wellbeing rather than give them income |
| what is redistribution in-kind as opposed to income support programs? | Doesn’t help in form of money |
| Why do many taxpayers prefer these types of programs vs the income support programs for the poor? | Taxpayers know that direct help is being given and they don’t think that their money is just going straight to somebody else to waste |
| are in-kind programs an inexpensive method to transfer purchasing power to the poor? | Yes |
| give some examples of in-kind government transfer programs | Food stamps, WIC, In-State Tuition, Grady Hospital, Medicare, etc. |
| Redistribution by Income Support | Gov transfers money income to poor and lets them decide how to spend money for their wellbeing |
| how does income support differ from in-kind transfers? | Helps in form of money |
| Name some income support programs | Social Security, Earned Income Tax Credit, Negative Income Tax, Guaranteed minimum income, unemployment compensation, etc. |
Created by:
MikalahQuillen
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