Income

Redistribu0on
Public Finance Week 4: Lecture 1 Hina Khalid

Housekeeping
Presenta0on groups uploaded to the student portal
Course outline Lectures Groups

5 % for aEendance as per the university policy

Final exam: 40% Mid-term: 25% AEendance: 5 % Quizzes: 15% Ar0cle Presenta0ons: 5% Project Report: 10%

Presenta0on topic: Pakistan government's income redistribu0on policies: 2000-2010

Lecture outline
Poverty Issues in interpre0ng poverty data Ra0onales for income redistribu0on
Simple u0litarianism

What is poverty ?

What is poverty?
Amartya Sen aptly sums up many dimensions of poverty as lack of capabilitycapability to overcome violence, hunger, ignorance, illness, physical hardship, injus0ce and voicelessness.

Poverty
Headcount of the poor: the propor0on of the popula0on with consump0on below the ocial poverty line.

Pakistan: Poverty headcount 1987-2006

Pakistan: percentage distribu0on of monthly income by quin0les ( 2005-06)

Has income distribu6on improved over 6me?

Pakistan: percentage distribu0on of monthly income by quin0les ( 2007-08)

Comparing poverty reduc0on in Pakistan with other countries

Problems interpre0ng the Distribu0onal Data

Census income consists only of familys cash receipts
in-kind transfers

Ocial gures ignore taxes Income measured annually Consump0on data may provide beEer assessment of well-being Problems dening unit of observa0on

Ra0onales for income redistribu0on

Simple u0litarianism The Maximin criteria Pareto ecient income redistribu0on Non individualis0c views

Simple U0litarianism
U0litarian Social Welfare Func0on: W = F(U1, U2, ,,,, Un) Promote Greatest Good for Greatest Number Addi0ve Social Welfare Func0on W = U1 + U2 + + Un
Assume
Individuals have iden0cal u0lity func0ons that depend only on their incomes U0lity func0ons exhibit diminishing marginal u0lity of income Total amount of income is xed

Implica0ons for Income Inequality

This is the ains net Paul gain g to this much society e u0lity
f
Peters marginal utility Pauls marginal utility

Peter loses this much u0lity

MUPeter Pauls income 0

Pauls income

Take ab from Social Peter and give twelfare o Paul maximized

a b I*

MUPaul 0
Peters income

Peters income

Evalua0ng the Assump0ons

Assump0on 1
Individuals have iden0cal u0lity func0ons that depend only on their incomes

Assump0on 2
U0lity func0ons exhibit diminishing marginal u0lity of income

Assump0on 3
Total amount of income is xed

Income Redistribu0on
Public Finance Week 4: Lecture 2 Hina Khalid

Housekeeping
Quizzes Next quiz Student presenta0on Project discussion

Lecture outline
Recap Todays lecture: Ra0onales for income distribu0on

Ra0onales for income redistribu0on

Simple u0litarianism The Maximin criterion Pareto ecient income redistribu0on Non individualis0c views

The Maximin Criterion

The Rawlsian social welfare func/on is:

Social Welfare Func0on W = Minimum(U1, U2, , Un)

Maximin criterion - No inequality acceptable unless it works to the advantage of the least well o Will the maximin criterion lead to a completely egalitarian society?

The Maximin Criterion

Rawls (1971) asserts it has ethical validity because of the no0on of original posi/on.
No0on that ex-ante individuals do not know where in the income distribu0on they will be.

Cri0que of Rawls
S0ll selsh view in original posi0on Individuals extremely risk averse here All that is relevant is the welfare of the worst-o person, even if a policy is extremely detrimental to everyone else.

Pareto Ecient Income Redistribu0on

Were the above func0ons pareto improving? Suppose that u0lity of richer person does depend on poorer persons u0lity. That is:

Government redistribu0on in this case could improve eciency. It may be dicult for the private market to do this, if, for example, the rich lack informa0on on just who really is poor. Simply an externality problem.
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Pareto Ecient Income Redistribu0on

Altruism plays a role in this example but .. But not just altruism. Self-interest could play a role. Suppose there is a possibility that, for circumstances beyond your control, you become poor.
When well-o, pay premiums. When bad 0mes hit, collect payo. Mo0va0on of some social insurance programs.

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Nonindividualis0c Views
Fundamental principles specifying income distribu0on derived independent of tastes
Incomes distributed equally as maEer of principle Platos 4:1 ra0o of highest to lowest income

Commodity Egalitarianism
Right to vote, food, shelter, educa0on, perhaps health insurance.

Processes versus Outcomes

Some argue that a just distribu0on of income is dened by the process that generated it. For example, equal opportunity in U.S.
Ensuing outcome would be considered fair, regardless of the income distribu0on it happened to entail.

Robert Nozick

Mobility

Society cannot redistribute income because society has no income to redistribute

Fair bit of income mobility (GoEschalk, 1997).

Corrup0on

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Project discussion
Topic: Federal Budget of Pakistan Goal: Reduce the decit while not hampering growth or increasing poverty 3 aspects:
Revenue ( Group A) Expenditure (Group B) Decit nancing ( Group C )