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Exam 4

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gasucaxa's version from 2017-03-16 14:32

Definitions And Concepts Chapter 12

Question Answer
distribution function –government policies aimed at changing the final distribution of goods/services across consumers, usually with the intention of realizing a “fairer” apportionment of consumption/income/wealth
redistribution – government policies designed to alter the distribution of income/wealth/consumption across members of society.
income –the flow of money earned by an individual during a period of time.
wealth –the current stock of money (and other valuable assets) that an individual owns at a point in time.
income support –monetary payments (such as unemployment benefits and social security payments) made to certain individuals, which directly alter the distribution of income within a society.
redistribution in-kind –public provision of goods/services (such as healthcare, education, housing, food) for certain individuals, which alter the consumption of goods/services within society.
poverty –the condition of having very limited access to goods and services.
poverty thresholds –income levels (based upon the number of and ages of individuals in a household) below which a household is deemed to be living in poverty.
poverty rate –the percentage of the population that is living in poverty.
Lorenz Curve –a graph (developed by economist Max Lorenz) which illustrates income inequality within a society by plotting the relation between cumulative fraction of the population (with people ordered from lowest income to highest) and corresponding cumulative fraction of total income earned.
Gini-Coefficient –a quantitative measure of income inequality based upon the Lorenz Curve, defined as the ratio of “the area between 45-degree line and the Lorenz Curve” to “the entire area below 45-degree line.”
Average Tax Rate (ATR) –the amount of total taxes paid divided by income.
Progressive Tax –tax structure for which ATR increases as the level of income is increased.
Proportional Tax –tax structure for which ATR remains constant as the level of income is increased.
Regressive Tax –tax structure for which ATR decreases as the level of income is increased.
Marginal Tax Rate (MTR) –the percentage of the next dollar earned that must be paid in taxes.
An Argument Against Coercive Redistribution –5. Libertarian Justice – the argument that the fairest distribution of income and consumption is the one realized when the government establishes and enforces a legal code which respects all voluntary economic interactions between individuals in society  ideas best articulated by Robert Nozick in Anarchy, State, and Utopia (1974)  “society” does not earn income; only individuals earn income => society has no rightful claim to the income earned by any person  government should sets rules of the “game” placing the utmost respect on individual property rights and choices, and then simply acts as the “referee”  whereas others try to judge “what distribution of income is best?,” Nozick and the proponents of Libertarian Justice deny the validity of the questionas long as the process for determining incomes is fair/just, the resulting distribution is fair/just (no matter how equal or unequal) => equality of opportunity is more important than equality of outcomesgovernment should enforce laws to guarantee that all people have the same opportunities to use their talents to earn income => but once the rules are established, the government has no reason (in fact, no legitimate authority) to alter the resulting distribution of income
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Definitions And Concepts Chapter 11

Question Answer
government failure –a situation in which Total Social Surplus is decreased by government intervention in a market  Two broad causes of Government Failure: (1) government fails to perform a necessary task efficiently and (2) government fails to do only those tasks that it should do
public choice –academic subfield which uses the tools and framework of economics to analyze issues that historically fall within the domain of political science
Condorcet Paradox –a situation in which a series of pair-wise majority votes over more than two options leads to a cycling of winners  first formalized in the 18 th century by Nicolas de Condorcet  when such a cycle occurs, it reveals that social preferences are irrational (i.e., not clearly defined) since they are non-transitive (i.e., internally non-consistent or internally contradictory)  seven specific sources of government failure: (1) informational problems, (2) costs of complying with government bureaucracy, (3) corruption or kleptocracy, (4) regulatory capture, (5) rent-seeking, (6) logrolling and rational ignorance, and (7) deadweight-loss from taxes
economic calculation problem –the argument that a system of planning will never be able to achieve efficient outcomes, precisely because under such a system the planners do not have the information generated by market activities available to them  first made by Ludwig von Mises and later refined by Friedrich von Hayek
costs of complying with government bureaucracy –when governments impose rules/regulations, individual households and firms need to expend resources to comply with the policies  use of resources for compliance imposes a cost => the greater the bureaucracy, the higher are these costs => if the costs are sufficiently large, they will outweigh any benefits of the regulation  “Permit Raj” in India: “a complex, irrational, almost incomprehensible system of controls and licenses” under which “everything needed (government) approval and a stamp.”  Recall the “Ease of Doing Business” study. Costs of starting a new business in… o Venezuela: 17 procedures, 144+ days, costing 88.7% of annual per capita income o New Zealand: 1 procedure, as little as half a day, costing 0.3% of annual per capita income
corruption –an environment in which regulations are not enforced and decisions are not made evenly and without bias => corruption leads to inefficient decisions
kleptocracy –an environment of extreme corruption in which government officials unabashedly seek personal gain at the expense of the public interest  present day Russia: “an ill-governed kleptocracy” in which “corruption is not a happy side effect of power, but the core of the system” and as a consequence “a small group of people wholly above the law has, in the past decade, become rich beyond the wildest dreams of the tsars.”
regulatory capture –a situation in which firms in a regulated industry influence a regulatory agency to the point where the agency enacts policies that are in the best interest of the regulated firms (even if the decisions are not in the best interest of the public)
rent seeking –attempts by people to manipulate government action or influence government decisions in order to make themselves better off at the expense of others  e.g., U.S. trade restrictions on imported peanuts  very beneficial to owners/workers of U.S. peanut farms (who therefore have a strong incentive to lobby hard to keep the restrictions in place) => peanut producers have an incentive to expend resources to secure these “rents”  costly to consumers, foreign peanut producers, and U.S. producers of any goods which use peanuts as an input
logrolling –the process by which a legislator votes to approve one bill in exchange for favorable votes from other members on other bills  not necessarily a “bad thing” => logrolling can be potentially beneficial, since it allows for an expression of “intensity of preference”  but, particularly when voters are “rationally ignorant,” the process can give rise to inefficient outcomes
rational ignorance –since becoming informed on matters of public policy has high costs and low benefits for individual voters, it is rational for them to remain uninformed  James Buchanan (1919–2013; Noble Prize in 1986) argued that politicians in a democracy often act so as to maximize their probability of re-election => it is in the best interest of the representative from GA to engage in logrolling (i.e., vote trading) with others to ensure passage of trade protection for peanuts (even if it means passing other programs as well)
incidence of a tax –a measure of who bears the burden of a tax in terms of decreased welfare  Equivalence between “per unit tax imposed on buyers” and “per unit tax imposed on sellers.” Consider either “a per unit tax of $T imposed on buyers” or “a per unit tax of $T imposed on sellers”…  The outcomes of these two alternative policies are identical in terms of: level of trade; per unit price ultimately paid by buyers; per unit price ultimately received by sellers; decrease in Consumers’ Surplus; decrease in Producers’ Surplus; tax revenue generated by the government; magnitude of resulting Deadweight-Loss.  That is, the two policies are equivalent to each other from the perspective of buyers, from the perspective of sellers, and from the perspective of society.  Thus, if the government were to impose an additional $1 of taxes on gasoline, consumers should not care whether they are responsible for paying the tax or if gas station owners are responsible for paying the tax.
Equivalence between “per unit tax imposed on buyers” and “per unit tax imposed on sellers.” –Consider either “a per unit tax of $T imposed on buyers” or “a per unit tax of $T imposed on sellers”…  The outcomes of these two alternative policies are identical in terms of: level of trade; per unit price ultimately paid by buyers; per unit price ultimately received by sellers; decrease in Consumers’ Surplus; decrease in Producers’ Surplus; tax revenue generated by the government; magnitude of resulting Deadweight-Loss.  That is, the two policies are equivalent to each other from the perspective of buyers, from the perspective of sellers, and from the perspective of society.  Thus, if the government were to impose an additional $1 of taxes on gasoline, consumers should not care whether they are responsible for paying the tax or if gas station owners are responsible for paying the tax
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7 Determinants of Productivity, Income, and Wealth

Question Answer
natural talent and ability –ability is not distributed equally at birth; some people possess attributes (e.g., intelligence, strength) that make them more productive
Acquired Skills –individual productivity depends in large part upon skills and experiences acquired during education, training, and work experience
Effort –productivity is often largely dependent upon effort (“workers” are more productive than “shirkers”)
Compensating Differentials –differences in wage rates that are due to differences in working conditions (e.g., risky jobs pay more; “glamour jobs” pay less)
Inherited Wealth –wealth is distributed less evenly than income (due partly to differences in inheritances)
Accumulated Savings –the stock of wealth that a person has at any point in time is partly determined by previous consumption/savings decisions
Seemingly Unrelated Market Conditions –income depends in part upon economic conditions beyond our control; a worker’s value depends greatly upon the price of the product he helps produce (e.g., wage of a coal miner would increase if we ran out of oil)
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4 Arguments in Favor of Coercive Redistribution

Question Answer
Utilitarian Justice –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 society should strive for the “greatest happiness for the greatest number of people” (i.e., attempt to maximize the summation of “utility” or “happiness” over all members of society) arguments first put forth by Jeremy Bentham (1748-1835) and John Stuart Mill (1806-1873)
Rawlsian Justice (Social Contract Theory) –the socially best income distribution is the one which maximizes the well-being of the worst-off member of society developed by the philosopher John Rawls in A Theory of Justice (1971) consider the “ideal society” that would be designed by someone in the “beforelife” behind a “veil of ignorance” (i.e., not knowing what their realized lot in life would be, but just knowing that it would be a random draw in this “ideal society”) => Rawls argues that such a person would be particularly concerned about the situation of the poorest person (i.e., the worst possible outcome) => such an objectively ideal society should implement policies to apply the “maximin criterion” Maximin Criterion–a claim that the government should aim to maximize the well-being of the worst off person in society
Labor Theory of Value –an assessment of the production process which attributes all economic surplus generated from production to labor Based upon the ideas of Karl Marx (1818-1883) Marx’s notion attributes no value to the capital (and other “non-labor inputs”) necessary for the production process since a capitalist system provides returns for all inputs (i.e., not only labor, but also capital and land), labor is vastly underpaid relative to what Marx believed was “fair” => thus, in the interest of fairness, income/wealth must be redistributed away from the owners of capital and toward workers
Overcoming the Free Rider Problem –if society prefers a more equal distribution of income/wealth, relying upon private charity to reduce inequality will result in too little redistribution (due to the “free rider problem”–recall the previous discussion of market provision of pure public goods) that is, private charity results in “too little” redistribution => have government redistribute in order to get an amount closer to the socially best level
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