4. Redistributive philosophies and incentives Consider a society comprised of tw

Question

4. Redistributive philosophies and incentives

Consider a society comprised of two people. Darnell earns an income of $100,000 per year and Eleanor earns an income of $30,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Darnell's income and give the revenue to Eleanor.

Without any incentive distortion, Darnell would retain $75,000 and Eleanor would end up with $55,000. However, let us assume that since Darnell will not receive all the income he earns, he decides to work less and earn an income of only $90,000, of which will be owed in taxes.

With the redistribution plan, Darnell will take home an income of $____. The $22,500 that Darnell pays in taxes will be transferred by the government to Eleanor. Let us assume that since Eleanor now receives payment from the government, she will not work as many hours and will earn an income from work of only $29,000 instead of her initial $30,000.

With the redistribution plan, Eleanor's total income (including the government payment received) is now $ ____.

Without a redistribution plan, total income in this society is $______ . After the redistribution plan is implemented, total income in this society is $_____ . Therefore, the redistribution plan _______ (Increases/Decrease) total income in this society.

According to the utilitarian political philosophy, the $22,500 transferred from Darnell to Eleanor will benefit Eleanor _____ (LESS/MORE) than it hurts Darnell.Which of the following statements is true according to this philosophy?

The government should not institute the plan because it has no right to take money from one person and give it to another.

The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss.

The government should definitely institute the plan because it will increase overall utility.

Explanation / Answer

The answers are as follows:

With the redistribution plan, Darnell will take home an income of $ 90000*(1-0.25) = $67,500

With the redistribution plan, Eleanor's total income (including the government payment received) is now $(29000+22500) = $ 51500.

Without a redistribution plan, total income in this society is $ (100,000 + 30000) = $130,000.

After the redistribution plan is implemented, total income in this society is $(67500 + 51500) = $119,000.

therefore, the redistribution plan Decrease total income in this society.

According to the utilitarian political philosophy, the $22,500 transferred from Darnell to Eleanor will benefit Eleanor LESS than it hurts Darnell.

The correct answer is:

b) The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss.

Reason: Here, actually the redistribution is not desirable as it decreases the total utility of both the individuals combined together.

Thanks!

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