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Summary Chapter 5 - Equity and social welfare
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Chapter 5 - Equity and social welfare
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Chapter 5Equity and social welfare
5.1 Introduction
Relevant implications from the two-sector model:
- A competitive economy producing the output mix at C will not necessarily
yield the most preferred distribution of income.
o May occur at point S
- Policy-induced movement along the PPC (from C to S) will necessarily
change the distribution of income.
o Therefore, places one individual in a worse position compared to the
other.
Criteria for assessing welfare effects of public policy:
- Pareto criterion → implies that policy-induced change is justified only if it will
improve the well-being of at least one person without harming that of another.
o Focuses on individual welfare.
- Bergson criterion → allows for welfare improvement even if one or more
individuals are harmed in the process.
o Less strict than pareto criterion.
o Focuses on average welfare.
o Can harm individual welfare provided that societal welfare as a whole
is not harmed.
, 5.2 Nozick’s entitlement theory
- Provides Pareto-based justification for redistributive policies aimed at
redressing past injustices.
Pareto criterion → associated with libertarian approach to public policy.
- Libertarian approach → individual freedom is the primary goal of the
community.
o Maximisation of “negative freedom” or protection of the right to not be
forced by others. → exercising your right in a way that does not infringe
those of others.
o Libertarians → opposed to distributional policies that infringe upon
individual freedom.
o Advocates a laissez faire system → governments role is reduced to the
responsibility of protecting individual freedom (caretaking role).
Nozick’s entitlement theory → exception to the libertarian rule
Principles of justice under entitlement theory:
1. Justice in acquisition → individuals are entitled to acquire things that do not
belong to others or do not place others in a worse position than before.
a. Things = property and capital goods only.
b. E.g. house does not belong to anyone else when you acquire
ownership of it and nobody is worse off now that you own it.
2. Justice in transfer → material things can be transferred from individual to
another on a voluntary basis.
a. E.g. grants, gifts, bequests, and voluntary exchange
b. Nobody is being forced to participate in the transaction.
3. Rectification of injustice in holdings → redistribution of wealth is potentially
justified only if one or both of the above two principals have been violated.
a. E.g. you take a property that belonged to someone else, and they did
not consent to the transfer of you owning it.
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