Question

Suppose the Occupy South Africa movement is considering a new policy that would slightly raise the marginal income tax for the top 1% and use the resulting revenue to improve the quality and capacity of health clinics for poor and medically underserved populations.

1. Is this policy likely to represent a Pareto improvement? Explain your answer in one or two sentences.

2. Is this policy likely to improve overall social welfare, according to a Rawlsian social welfare function? Explain your answer in one or two sentences.

3. Is this policy likely to improve overall social welfare, according to a utilitarian social welfare function? Explain your answer in one or two sentences.

Answer 1

a- No, this policy is not a pareto improvement. For pareto improvement, either all parties have to be better off or some have to be better off while others remain in status quo. In the above policy, while the poor will be better off, the rich will be worse off as their utility will fall due to higher tax.

b- Yes, this represents an improvement in the overall social welfare by the Rawlsian criterion. In Rawls' criteria, the social welfare is measured as the utility of the worst off. W= min{u1, u2...un}. So, even if the rich are marginally worse off, the poor will be better off, raising the utility of the lowest class, thus increasing social welfare.

c- We can't comment unambiguously about the effect on welfare through a utilitarian perspective which measures welfare as the sum total of individual welfare. W= u1+u2+...+un. So, the rich are worse off and the poor are better off. Whether the policy is welfare improving or not will depend on the relative strengths of the changes. If the poor are more better off than the rich are worse off, then it is welfare improving