Public Welfare

Question 1

Lorenz curve

Answer 1

Shows the income distribution based on cumulative % of income earned by % of population. L curve is compared to perfectly equal distribution.

Question 2

Gini coefficient

Answer 2

shows income distribution as a value between 1 (perfectly unequal) and 0 (perfectly equal).

Calculated by dividing area between p. equal and the L curve / total area between p.equal and unequal distribution lines

Question 3

Govt intervention in markets

Answer 3

Subsidies
Progressive taxes
Welfare
Unemployment benefits
Price ceiling -> protects low income, lower than equilibrium, more demanded than supplied
Price floor -> protects producers, lowest possible price is set at higher than equilibrium and more supplied than demanded

Question 4

Pareto welfare theorem

Answer 4

An improvement in utility for one person is always at the expense of someone else

Laissez-faire, free market economy

Assumption: we cannot measure or compare individual utility and cannot asses the national welfare effects of income redistribution

“Potential” Pareto improvement -> creates a new situation where in theory the winners are capable of compensating the losers completely, while the winners themselves still have some extra benefit left (Neo-Paretian)

Question 5

Pigouvian welfare theorem/ subjective welfare theory

Answer 5

Law of diminishing marginal returns

Identical utility functions for all people implied -> Possible to compare changes in welfare distribution between people

Money redistributed from rich results in a welfare decrease smaller than the increase of welfare experienced by poor because poor have higher marginal utility of money