Ch. 11: Distribution Function of Government

What are the three common justifications for government intervention in markets?

• Allocation function

• Distribution function

• Stabilization function

Define redistribution.

• Government policies designed to alter the distribution of income/wealth/consumption across society.

Differentiate income and wealth.

• Income is the flow of money earned by an individual during a period of time.

• Wealth is the current stock of money (and other valuable assets) that an individual owns at a point in time.

What are the two methods of redistribution?

• Income support — monetary payments made to certain individuals, which directly alter the distribution of income within a society. ex. unemployment benefits or social security benefits

• Redistribution in-kind — Public provision of goods/services for certain individuals, which alter the consumption of goods/services within society. ex. healthcare, education, housing, food

Define poverty, poverty threshold, and poverty rate.

• Poverty is the condition of having very limited access to goods and services.

• Poverty threshold refers to income levels below which a household is deemed to be living in poverty.

• Poverty rate is the percentage of the population that is living in poverty.

Differentiate global poverty and “normal poverty.”

• Poverty is relative to the country; what is considered poverty in the U.S may be relatively good-quality living in India.

Which two facts complicate poverty?

• The fact that we continually “raise the bar” for what it means to not be living in poverty

• Overall standards of living have greatly increased over the past few decades

Define time price.

• The amount of time that a person has to work to earn enough money to buy something, computed as monetary price divided by monetary hourly wage rate.

What are the 7 determinants of productivity, income, and wealth?

• Natural talent and ability

• Acquired skills

• Effort

• Compensating differentials, i.e. differences in wage rates due to differences in working conditions

• Inherited wealth

• Accumulated savings

• Seemingly unrelated market conditions — income can largely depend on economic conditions beyond one’s control

Explain the arguments in favor of coercive redistribution.

• Utilitarian justice — total social welfare can be decreased by transferring income/wealth from the rich to the poor, so long as people have a diminishing marginal utility for money

• Rawlsian justice (Social contract theory) — The socially best income distribution maximizes the well-being of the worst-off member of society (Ie. Maximin criterion: A claim that the objective of policy should be to maximize wellbeing of the worst off person in society)

• Labor theory of value — Attributes all economic surplus generated from production to labor; based on Marx’s belief that the value of an item depends upon the amount of labor used to produce it

• Overcoming the free-rider problem

• Libertarian justice — Believes the fairest distribution of income and consumption is that which results when the government establishes and enforces a legal code which respects all voluntary economic interactions between individuals in society; equality of opportunity is more important than equality of outcome.