Question

Imagine that a society has a gini coefficient of 0.3. According to the Maximin Criterion has this society reached the efficient level of redistribution? Explain your answer

Answer 1

The Lorenz curve of income distribution shows the percentage of income that belongs to each percentage share of the population in the economy. The Lorenz curve is used to calculate the extent of inequality in the economy. The inequality is measured by the Gini coefficient which is the ratio of the area between perfect equality and Lorenz curve and perfect equality and inequality. The Gini coefficient varies from 0 to 1. Here 0 implies the income distribution is perfectly equal and 1 implies perfect inequality (higher percentile have all the income).

The maximin criterion of income redistribution the policymaker should adopt a policy that aims at increasing or maximizing the utility of the person with minimum wealth. That is the income distribution should have equal income for each percentile of the economy. According to the maximin criterion, thus the income distribution should be equal or the Lorenz curve should coincide with the perfect line of equality. This also implies that the Gini coefficient should be equal to 0.

In this case, the Gini coefficient is 0.3. Therefore, according to the maximin criterion, the economy has not reached the efficient level of redistribution.