Lecture Public economics (5th edition) - Chapter 5: Equity and social welfare

This chapter distinguish between the Pareto and Bergson criteria for a welfare improvement, discuss Nozick’s entitlement theory and its relevance to the recent history of South Africa, explain how a redistribution of income can be justified in terms of the theory of externalities, distinguish between the cardinal and ordinal social welfare functions, discuss the efficiency implications of policies aimed at redistributing income from rich to poor people.

• Distinguish between the Pareto and Bergson criteria

for a welfare improvement

relevance to the recent history of South Africa

justified in terms of the theory of externalities

welfare functions

at redistributing income from rich to poor people

Criteria to assess welfare effects of public policy

Justice in

acquisition

states that individuals

are entitled to acquire

things that do not

belong to others or do

not place others in a

worse position than

before.

Justice in transfer

states that material things can be transferred from one individual to another on

a voluntary basis, for example, in the form of gifts, grants, and bequests, or through voluntary exchange.

Rectification of injustice

states that a redistribution

of wealth is potentially justified only if one or both of the irst two principles have been

violated.

• Externality argument for redistribution

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–

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• Social welfare function

–

–

A redistribution of income can be justified on welfare grounds even

if it places one or more individuals in a worse position.

• Willingness to work

– Income and substitution effects ((dis) incentive effect)

The expected benefits of a policy of redistribution should be carefully weighed against the possible negative effects it might have on labour supply and on savings and investment, and hence on economic growth in the long term.