Economics for Inequality and Optimal Income -myassignmenthelp.com

Question: Discuss about theEconomics for Inequality and Optimal Nonlinear Income. Answer: The maximin criterion for income distribution states that the income distribution will be optimal in the society if the utility of the lowest utility individual or the individual who is worse off in the society is maximized. This means that this theoretical framework advocates the increase in he welfare of the member who is least well-off. According to this framework there should be complete equality and departures should only take place if it increases the welfare of the least well-off member (Bosmans and Ooghe 2013). However, as this criterion justifies the policies, which advocates equal distribution of income and believes in transferring income from rich to poor in order to achieve its goal of welfare maximization, it leads to distortions from the actual egalitarian concept. In presence of completely equal distribution of income, the workers who are more efficient and are more productive will lose incentive to work hard as they do not earn any extra privilege. This will in turn decrease the total productivity, which will reduce the welfare of the least well off members even more. The maximin criterion, unlike this, allows disparities as that can help in improving the welfare of the poor (Kanbur and Tuomala 2013). However, this construct can lead to distorted outcomes of denial of ethical validity and decrease in the welfare of majority to increase the welfare of a few because the maximin criterion specifically targets the well-being of the socially worse off person. The government of a country usually indulges in borrowing money for expenditures when the total collection of tax is less than the total expenditures of the government. In such situations, when the tax collection is low, deficit financing becomes a crucial way on part of the government in order to manage its expenses such that the provisions of the public goods and services are not compromised (Imam 2012). If Federal Government borrows money to finance its expenditures, then this might have several implications on the economy as a whole. The primary implication on the economy is the rise in the overall price level due to the rise in the aggregate demand which is facilitated by the increase in the government expenditure. However, this also has a positive effect on the employment as it increases with the increase in the aggregate demand. However, uncontrolled usage of this type of borrowing on part of the government can lead to an upward pressure on the inflationary statistics, which in turn can be hurting for the economy as a whole (Anderson 2012). As a central planner, it is of immense importance to choose the appropriate social welfare function as while doing so the overall welfare of the society as a whole as well as the individual welfare of each of its members has to be taken into consideration. The additive social welfare functions target the maximization of the welfare of the overall society (Sen 2014). However, it fails to take into consideration how well of the members in each strata of the society are and does not reflect the dynamics in inequality prevailing in the society. The maximin social welfare function on the other hand, targets to maximize the welfare of the lowest privileged class but on the other hand is not completely egalitarian in nature, thereby having provisions of incentives to work hard. Therefore, as a planner it will be more optimal to select the later over the former, as the function which maximized the welfare of the least privileged automatically is expected to increase the overall societal welf are (Asheim, Mitra and Tungodden 2016). The free market equilibrium occurs at the point where the Marginal Social Benefit is equal to the Marginal Private Cost: MSB = 15 P/2 and MPC = (2/5)P -2 Therefore, 15 P/2 = (2/5)P 2 From this it can be seen that P = 18.89 Putting the value of P in MSB: Q = 15 9.4 Q = 5.6 Therefore, the equilibrium price of wig is 18.89 and equilibrium quantity is 5.6. For socially optimal level, the marginal social benefit should be equal to marginal social cost: MSC = MPC + Marginal Damage MSC = 2P/5 2 + P MSC = 7P/5 5/2 At the social equilibrium, MSC = MSB 7P/5 5/2 = 15 P/2 19P = 350/2 = 175 P = 9.2 Quantity = 15 (9.2/2) = 15 4.6 = 10.4 Quantity = 10.4 (Cordato 2013) Here, as the social optimal level of output is higher than the equilibrium level, so the output has to be increased and the price is decreasing in the social optimal level. So, the government needs to give subsidy of amount (18.89 9.20) = 9.69 per unit to the producer. Public good, by nature are non rival (that is the marginal cost of consumption of the good by another person is zero) and non excludable (that is no one cannot be denied access for consuming the same). Given this characteristics, the public goods give rise to the problem of free rider, that is, the people who are not paying for the goods tend to take the advantages and cannot be stopped (Sharma and Teneketzis 2012). Due to this the private sector tends to under-provide the public goods, thereby not meeting the social demand. In this case the only way out which remains is the provision of the good by the government. Though this kind of provision leads to crowding out and free riding problems, but public goods being welfare augmenting ones, the provision of these goods by the government leads to a more equitable distribution. However, if left in the hands of the private sector, the production can be efficient in terms of production but the efficient level of production may not be equal to the demand for the public goods in the society (Hindriks and Myles 2013). Higher education, if not subsidized, becomes too costly for the poor to afford. In such scenarios it become a service whose advantage can only be enjoyed by the richer class. Therefore, higher education, theoretically, should be subsidized by the government to make it available for people of all strata of the society. However, this might imply a considerable burden on part of the government, but in the long run it is expected to benefit the economy as a whole due to bigger provision of higher education and development of skill and human capital (Burkhead and Miner 2016). When the discount rate is 0%, the PV of project one is $90 and that of project two is $100. Therefore, the second project is preferred in this case. However, when the discount rate is 4%, the PV of project one is $90. But, the PV of project two is = 100/(1 + 0.04)2 = 100/1.0816 = 92.45 Therefore, the PV for project two is $92.45. Therefore, in this case also project two will be preferred. The cost benefit approach is an analytical tool which helps in assessing the cost of undertaking a project and the benefits which are expected to be accrured from the same. The method in which it works helps in achieving efficiency for the society. However, there are equity issues regarding this mode of analysis. In general, the cost benefit analysis deos not take into account the equity issues as it concerns with the calculation of costs and benefit in cardinal sense and does not take into consideration the external utilities or disutilities which cannot be cardinally measured per se. However, if the costs and benefits, including those which are not accounted for, can also be taken into account, then the equity issues can also be addressed with the help of this analytical tool (Nas 2016). References Anderson, B.M., 2012.Economics and the public welfare. Liberty Fund. Asheim, G.B., Mitra, T. and Tungodden, B., 2016. Sustainable recursive social welfare functions. InThe Economics of the Global Environment(pp. 165-190). Springer International Publishing. Bosmans, K. and Ooghe, E., 2013. A characterization of maximin.Economic Theory Bulletin,1(2), pp.151-156. Burkhead, J. and Miner, J., 2016.Public expenditure. Springer. Cordato, R., 2013.Welfare economics and externalities in an open ended universe: A Modern Austrian Perspective. Springer Science Business Media. Hindriks, J. and Myles, G.D., 2013.Intermediate public economics. MIT press. Imam, I., 2012. Deficit financing and its implication on private sector investment: The Nigerian experience.Oman Chapter of Arabian Journal of Business and Management Review,1(10), pp.45-62. Kanbur, R. and Tuomala, M., 2013. Relativity, inequality, and optimal nonlinear income taxation.International Economic Review,54(4), pp.1199-1217. Nas, T.F., 2016.Cost-benefit analysis: Theory and application. Lexington Books. Sen, A.K., 2014.Collective choice and social welfare(Vol. 11). Elsevier. Sharma, S. and Teneketzis, D., 2012. Local public good provisioning in networks: A Nash implementation mechanism.IEEE Journal on Selected Areas in Communications,30(11), pp.2105-2116.