4. Living Interdependently: public goods and externalities

Question 1

Why is their government involvement in inequality?

Answer 1

Market cannot correct itself

Question 2

What determines income distribution in the general equilibrium framework?

4 things

Answer 2

.

Question 3

Optimise the constrained demand function?

Answer 3

.

Question 4

What is the market clearing condition?

Answer 4

.

Question 5

Is there a mechanism to equalise income when prices are determined by supply and demand?

Answer 5

Question 6

What is the sample size when Income inequality is measured?

Answer 6

• Measured based on samples of indivduals in the population
• Typically household income is observed

Question 7

Complications of using income inequality as a measure of inequality

Answer 7

• Difficult if you live in a household with multiple people (E.g. There may be a dependent person in the household)

Question 8

What do we do to adjust for the inaccuracy that can result when measuring income inequality as a result of people living in multi-person households?

Answer 8

• Equivalised income (Adjusting for household composition)
• OECD modified equivalence scale since the 1990s: A value of 1 to the household head, 0.5 to each additional adult and 0.3 to each child (Adds weights)

Question 9

What is the OECD eqivalence sclae

Answer 9

Question 10

2018 UK equivalised household disposable income

Answer 10

Question 11

The UK distribution of wages

Answer 11

Question 12

What is missing from our simple model (where income is determined by labour supply and productivity)?

Answer 12

.

Question 13

Rewards and inequality
* What is it determined by?
* What does it differ across and why?

Answer 13

• Determined by market equilibrium
• Differ across time and space due to distribution of property rights, relative scarcity of different skills

Question 14

International trade and inequality

Answer 14

Rising inequality is associated with rising prices that come around due to globalisation

• Trade agreements = reduction in protectionism. Income can be affected by ways other than direct ways (Can affect prices in an open economy)
• Lower prices of goods, that are import- competiting
• Lowering of the wages of those who produce the lower priced goods

Question 15

Thomas Piketty: Capital in the 21st century
* What does he argues causes inequality?

Answer 15

.

Question 16

Equivalised income example

Answer 16

Question 17

Gini coefficent

Answer 17

• Standard measure of inequality
• Named after Itlian Statitician Corrado Gini

Question 18

Lorenz curve

Answer 18

Graphical representation of the distribution of income within a population
Named after American economist Max Otto Lorenz

Question 19

Equality line
The basics of the Lorenz curve

Answer 19

Question 20

What is the approximate Gini coefficent equation

Answer 20

Question 21

Higher and Lower inequality

Answer 21

Question 22

Share of income example

Answer 22

Question 23

Lorenz curve example
Draw the graph

Answer 23

.

Question 24

Gini coefficent across countries

Answer 24

Question 25

What are the big debates about inequality

Answer 25

Question 26

What are the two key views of the market system?

Answer 26

Question 27

The work of Robery Nozick

Answer 27

Question 28

Proxy for wellbeing, so is income the same as welfare?

Answer 28

Question 29

Why is income a good proxy for utility?

Answer 29

Income is cardinal and comparable (common metric) across individuals

Question 30

What happens when all income is spent?

Answer 30

Consumer is on the budget line

Question 31

Utility and income Cobb-Douglas

Answer 31

Question 32

Answer 32

Question 33

Answer 33

Question 34

Diminishing marginal utility Slide 42 and 43

Answer 34

Question 35

Measuring utility: Neuroscientific methods

Answer 35

Question 36

Measuring utility: Life satisfaction surveys

Answer 36

Question 37

What is Inequality aversion? Piguo- Dalton Theory of transfers

Answer 37

.

Question 38

Class of social welfare functions * Utilitarianism * Preference for equality (Inequality aversion) * Ralwsian

Answer 38

Question 39

Utilitarianism social welfare function

Answer 39

Question 40

Inequality aversion social welfare function * Graph * Is the sign positive or negative?

Answer 40

.

Question 41

Rawlsian (maximin) social welfare function

Answer 41

Question 42

Rationale for inequality aversion:

Answer 42

Question 43

What is prioritarianism?

Answer 43

Give more social weight to individuals who have less

Question 44

Why might inequality be a good thing?

Answer 44

Question 45

Gini coefficient equation (not approximation )

Answer 45

Question 46

Gini coefficent example

Answer 46

Question 47

Deprivation vs Inequality? • Should we focus on the well-being of those with the lowest income?

Answer 47

Question 48

Relationship between life satisfaction and income

Answer 48

Question 49

(Starmans et al 2017) How is a preference for fairness distinct from a preference for equality?

Answer 49

* Actually prefer unequal societies. * Equal distribution is seen as a moral good * Norton and Ariely: Individuals are nto worried largely about inequality, but prefer it * When the equal outcome is the fair one, then then equality is desired. But if their is a disparity in productivity, then inequality should be the fair option as the more productivie person should be rewarded. * Meritocracy * Fairness solves the issue of free-riders, cheaters and bad actors.

Question 50

(Starmans et al 2017) Should reducing inequality be a conscious objective of government?

Answer 50

* Inequality leads to violence, teenage pregnancy, interpersonal distrust and higher divorce * Inequality reduces hapiness amonng bottom earners * Workers on the low end have low effort

Question 51

(Starmans et al 2017) Can there be too much equality?

Answer 51

* When it coincides with fairness, then equality should be desired. But if it is not fair, then equality is not desired * Individuals who are too cooperative run the risk of being taken advanatage of * This would penalise high productivity individuals * Inequality promotes people to work harder (meritocrativ mobility)

Question 52

(Kanbur et al, 2018) What is 'inequality of opportunity'? How does link to 'circumstances' and 'effort' as determinants of outcomes?

Answer 52

* Inequality of oppurtunity: Fraction of the variation of income which is attributed to circumstance * Roemer: Cirumstance (Factors outside of your control like gender) and effot (Characteristics that individuals can control like education) determine income