Chapter 15: Distribution

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Chapter 15 Distribution

• May 20, 2009

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Pareto optimality

• Economics defines efficiency as the Pareto
  optimal allocation of resources by the market
• Assumption?
• Efficient allocation best satisfies individual
  wants weighted by the individuals ability to pay
  (by income and wealth)
• Issue of distributive equality is avoided
• Economics assumes certain cultural values
• (1) objective efficiency
• (2) redistribution efficiency not considered

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Distribution of income and wealth

• Wealth stock of assets, measured at a point in
  time (eg?)
• Income flow of earnings from these assets
  earnings of your own labor power (or human
  capital) over a period of time
• Income and wealth two different magnitudes,
  measured in different units, and distributed
  differently over the population (eg vs /time)
• Wealth usually more concentrated than income
  financial wealth even more concentrated
• Why the distribution of wealth among individuals?
  
• Historical result of whose ancestors got there
  first individual ability and effort luck

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Measuring distribution

• Lorenz curve plots the of total income going
  to each of income recipient (income on the Y
  axis, and income recipients on the X axis)
• The closer the curve to the 45-degree line, the
  more equal the distribution the farther away,
  the less equal. The shaded area (between the
  curve and the line) measures inequality
• Gini coefficient ratio of the shaded area to the
  total triangular area under the 45-degree line
  used to measure the inequality of the
  distribution of wealth or income across a
  population
• Gini coefficient of 1 perfect inequality
  coefficient of 0 equal distribution
• Also concerned with wealth and income between
  countries and not only within countries

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Measuring distribution

• Is there a legitimate range of inequality, beyond
  which further inequality becomes either unfair or
  dysfunctional? What do you think?
• Plato richest citizen should be 4 X wealthier
  than the poorest
• Ecological economics since real total output
  cannot grow forever, then the total is limited,
  then the maximum for one person is implicitly
  limited
• Functional distribution of income What about
  paying for natures contribution? Who would
  collect?

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Consequences of distribution for community and
health

• Inequality of income distribution has a
  substantial effect on rates of death and sickness
  regardless of the absolute level of income of
  the poor. How?
• Less control over the circumstances of your life
• Greater risk of job loss
• Lower level of social standing and respect
• More frequent experiences of disrespect and shame
• More threatening life and the threat comes from
  those above the hierarchy
• Indirect social effects on health (see Table
  13.1)

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Intertemporal Distribution of Wealth

• What about the distribution of resources between
  generations and not only within a generation?
• Should we try to make the future better off than
  the present? Do we have an obligation to make
  sure it is not worse off than the present?
• 2 alternative approaches
• ? ecological economics approach based on
  ethical judgments concerning obligations to
  future generations (intergenerational justice)
• ? more mainstream economics approach based on
  an objective decision-making rule
  (intergenerational allocation)

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The normative approach of ecological economics

• Since you didnt choose to be born in this
  generation, there is no moral justification for
  claiming your generation has more right than
  another
• Therefore future generations have an inalienable
  right to sufficient resources to provide a
  satisfactory quality of life, and we have a
  corresponding duty to preserve an adequate amount
  of resources
• What is adequate? Depends on technological and
  ecological change. Both characterized by
  ignorance.
• Ethical decisions affect our actions.
• Practically, what does this mean?

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The positive approach of neoclassical economics

• Not an ethical problem, but a technical problem.
  How?
• Comparing future benefits and costs w/ those that
  occur in the present. How?
• Intertemporal discounting -gt valuing the future
  less than the present people preferring things
  now rather in the future. Why?
• (1) impatience -gt pure time rate of preference
• (2) opportunity cost -gt if money is fungible,
  then it gets more weight to any resource today
  than the same resource tomorrow
• (3) expectation of future riches -gt richer future
  argument
• Net present value what present and future costs
  and benefits are worth to us today. Implication?
• Box 15-2

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The positive approach of neoclassical
economics discounting reconsidered

• Intertemporal discounting makes sense for the
  individual and for market goods. Does it make
  sense for society and for nonmarket goods?
• How are societies different than individuals?
• Immortal (relatively) -gt therefore, all
  economists agree that social discount rates lt
  individual discount rates
• Social discount rates rate of conversion of
  future value to present value that reflects
  societys collective ethical judgement as opposed
  to an individualistic judgment
• No agreement on opportunity cost of capital

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The positive approach of neoclassical
economics opportunity cost of capital

• Financial capital we can invest it if we have it
  now. But a social discount rate into the
  indefinite future may be inappropriate because
• (1) the real value of can only grow if the
  production of goods and services that can
  acquire also grows. What is the problem here?
• (2) many investments are profitable because we
  ignore many of the costs of production
• (2b) if we consider that natural capital must be
  treated separately from manmade capital (why?)
  then the decline in natural capital law of
  diminishing marginal utility -gt negative discount
  rate to natural capital, or positive discount
  rate only to highly fungible goods and services
• (3) only finite opportunities for productive
  investment in an economy
• (4) technology at best can complement
  resources and can never replace them

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So what can we say about discount rates?

• Make sense for individuals in the short run,
  and for some small-scale, short-term social
  projects
• Intertemporal allocation apportionment of
  resources across different stages in the
  lifetimes of basically the same set of people
  (same generation)
• Intertemporal distribution apportioning of
  resources across different generations
• Distribution is different from allocation ?
  therefore justice replaces efficiency as the
  criterion for policy when time periods become
  intergenerational

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Big Ideas to Remember

• Pareto optimality
• Role of scale and distribution in defining Pareto
  optimal allocation
• Income distribution vs. wealth distribution
• Functional vs. personal distribution
• Social limits to range of inequality
• Lorenz curve
• Gini coefficient
• Inequality and health
• Intertemporal distribution vs. intertemporal
  allocation
• Discounting and net present value
• Pure time rate of preference
• Individual vs. social discount rate

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Exam May 22nd

• Material on the exam
• Environmental Economics
• Chapters 6, 7, 8, 13,
• Ecological Economics
• Chapters 10 and 15
• GDAE
• Extra reading
• Including Chapter 13 in Ecological Economics
• Including material in Valuing Earth