Utility Functions
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Economists usually work with utility functions that are curved.
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Typically, they mean that an x% income loss “hurts” more if you make $20,000/year than if you make $1,000,000/year.
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(Behavioral economists have found strong reference point effects, too.)
- $50,000/year feels different if you used to earn $20,000/year than if you earned $1,000,000/year
Inequality
Wealth or Income Setup:
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10 poor people, each $1,000.
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1 rich person, $100,000.
- PS: likely will be you.
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Inequality Ratio: 100-to-1
Questions
- Does inequality have intrinsic negative externalities?
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- Should society redistribute wealth?
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- Does it matter whether it’s inherited? “Earned”?
What If?
(Base: 10 x $1,000. 1 x $100,000)
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Take $50,000 from rich. Give $5,000 each to poor.
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Greatly reduced inequality.
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10 poor people, each $6,000.
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1 rich person, $50,000.
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Inequality Ratio: 100-to-12, not 100-to-1
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Better?
What If?
(Base: 10 x $1,000. 1 x $100,000)
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Take $50,000 from rich. Give $2,500 each to poor. Lose $2,500 in process.
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Greatly reduced inequality.
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10 poor people, each $3,500.
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1 rich person, $50,000.
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Inequality Ratio: 100-to-7, not 100-to-1
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Better?
What If?
(Base: 10 x $1,000. 1 x $100,000)
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Take $50,000 from rich. Lose all in process.
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Still greatly reduced inequality.
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10 poor people, each 1,000.
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1 rich person, $50,000.
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Inequality Ratio: 100-to-2, not 100-to-1
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Better?
Incidentally…
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Almost all wealth statistics are quoted before redistributive activities.
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In real life, not all redistribution is from rich to poor.
Fighting CC
Setup:
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10 poor people, each earning $1,000/year.
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1 rich person, earning $100,000/year.
Choices:
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#1: Reduce income of poor people by 1% each
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#2: Reduce income of rich person by 1% each
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#3: Reduce income of poor and rich alike by 0.5%
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(What would most economists propose?)