Question

1. Explain why the market might provide less than the Pareto optimal amount of income redistribution. Is this an argument for using tax revenues as a source of income to redistribute? Explain both sides of the argument. Which side do you think is correct?

Answer 1

Argument for

When an economy maximises total economic welfare for a certain comhination of preferences of the consumers and a given level of distribution of income , then that economy is said to be Pareto efficient.

The market provide less than optimal amount of refistribution because they consider income to be redistributed with the help of tax revenue collecred.

The income collected by taxation can be redistributed among the poorer sections of the society for increasing their welfare

An individuals income changes with income redistribution along with their preferences. An economy will comprise of different types of markets. So, there will be different equilibrium points in each markets which are Pareto efficient

Argument against

In practise it is very difficult to make some one better off without making someone worse off.

When we impose taxes we are actually taking the purchasing power from the hands of a few and is redistributing it to others . So the people who are taxed is being exploited for the benefit of others