EC8005b Lecture 10 2014 - Trinity College Dublin · USA: Inequality rose in 2nd thhalf of 19 C, declined over the 20th C and rose again after 1970. Kuznets curve seemed to fit. UK:

EC8005b Understanding Markets 1

Understanding Markets

EC8005b – Lecture 10

2014

Michael King

EC8005b Understanding Markets

Course Outline

1. Course Introduction

2. Demand and Supply

3. Market Equilibrium and Applications

4. Elasticity and its Applications

5. The Consumer and Demand

6. The Firm and Supply

7. Market Structures

8. Markets and States

9. Microeconomic Policy Issues in Ireland

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Topic 10: Microeconomic

Policy Issues

Structure:

1. Social Justice in Ireland

2. Budget: Microeconomic Issues

3. Course Summary

4. Examination


What is social justice?

Somewhere

between depending

on how radical your

thinking:

Rawlsian income

equality

Equality of

opportunity

4


Dimensions

While we know that income/wealth does not

translate well into happiness, there is tendency

to focus on them because we have the data.

Interconnections

5


Measures of Inequality Developed by the American

economist Max Lorenz in 1905.

Cumulative percentage of wealth

measured along the y-axis and the

cumulative percentage of

households measured along the x-

axis.

45 degree line is the line of absolute

equality.

The more unequal a society the

more the LC will bow away (deviate

from) the line of absolute equality.

Gini coefficient = ratio of the area

between the Lorenz Curve and the

line of absolute equality (numerator)

and the whole area under the line of

absolute equality (denominator).

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Evolution of Economic Inequality

Theory of the Kuznets curve: Modern sector

grows first, followed by redistributive

policies and wider access to education.

USA: Inequality rose in 2nd half of 19th C,

declined over the 20th C and rose again

after 1970. Kuznets curve seemed to fit.

UK: Inequality rose with the industrial

revolution, fell for a century until 1977

before rising thereafter.

Theory 1: Regan/Thatcher era policies

cause of recent rise in inequality.

Theory 2: Capitalism tends towards

inequality, 2 wars and GD obscured this

relationship.

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Growth and Preferences

Nature of Economic Growth

Technological change has been cited as a major reason for the rise in inequality

in the US since 1970.

Long-run Preferences

Evidence from cross-country and US studies suggests that ethnic diversity leads

to less redistributive policies.

Inequality in Scandinavia was always about half that of the UK and US

suggesting differences in underlying preferences.

Short-run preferences turned into policy

FDR’s New Deal in the 1930s

Clement Atlee’s Labour Party Government introduced the NHS and significant

welfare benefits.

Centre-right governments in the 1980s and early 1990s reduced taxation and

pursued moderate welfare levels.

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Costs of Inequality The disutility of unfavourable comparisons rather than poverty itself.

Inequality affects our ability to identify with and empathise with other people.

Literature suggests that important outcomes are closely related to levels of

inequality and not average income levels in developed countries:

Mental illness are five times higher in the most unequal societies.

In more unequal societies people are five times as likely to be imprisoned and six

times as likely to be clinically obese.

Levels of societal trust and sense of community is demonstrably higher in more

equal societies.

Impact on expectations (e.g. Indian Cast Experiment)

Transcending generations as differences in wealth, education norms and

identity persist.

Economic loss of talent does not reach potential.

Link to competitiveness?

9


Costs to Reducing Inequality

Benefits of reducing inequality can not be

considered without reference to the costs

of policies designed to reduce inequality.

Distortionary costs:

– Disincentive to work (labour tax)

– Reduction in consumption (VAT)

– Disincentive to invest (Corporation/capital

gains tax)

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Ireland’s performance

Comparing income shares of top and bottom 20% (counter-cyclical)

– Ratio fell during 1980s, rose in the boom and has fallen between 2004-

2008, mostly due to changes in share of top 20%, rose in 2010 as stock

markets rebounded globally.

– 2004 onwards share of bottom 20% rose until cutbacks 12


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Voting on redistribution given median income is lower

than average income

Expect significant redistribution but costs are known,

potential for social mobility, natural right of possession.

Surveys show only 8/56 countries have more than 50%

of people believing that incomes should be made more

equal.

15


Measures of poverty

Absolute vs. Relative

Ireland’s “At risk of poverty” rate = all

individuals below 60% of median income.

Ignores savings, debt et, income fluctuations,

past investment in consumables, work related

expenses and regional differences.

Ireland’s “consistent poverty rate” earn less

than 60% the median and enforced absence of

two basic necessities.

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Equality of Opportunity

More consistent with the natural distribution of talents in

society.

Measure by intergenerational mobility and an elasticity

between parental and child income.

Estimates:

Scandinavia and Canada = 0.13 - 0.28

UK and USA: 0.4 - 0.6

Cross-country evidence suggests higher levels of

redistribution are an essential, along with the provision of

public services, to achieve high levels of social mobility

between generations.

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2. Microeconomics of the

Budget: Discussion Consumer Theory Maintained 9% VAT rate for tourism related activities

Price of 20 cigarettes rises by 40 cent

Producer Theory Competition issues not relevant (See IMF statements on legal

reform)

Social Justice Child benefit to increase by €5 per month.

25% Christmas bonus will be paid to welfare recipient s in

December.

Strengthening of the incentive to work through changes in USC

and income tax bands.

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3. Course Summary

1. Supply & Demand (Elasticities, Equilibrium)

2. Applications (minimum wages, price ceilings/floors etc)

3. Consumer Theory (Indifference curves, budget

constraint, equilibrium, CS)

4. Producer Theory (Cost structures and profit, PS)

5. Market Structures (Four types, rationale for competition

policy)

6. Market Failures and the Role of the State (Externalities,

public goods and social justice)

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4. Examination

• Answer 4 questions of 6.

• Three hour exam; 45 minutes per

question.

• High marks will be achieved by answering

the question directly and by: – Presenting clearly and explaining well technical details

(diagrams, algebra and reference to assumptions).

– Enlightened discussion of relevant material that is precise,

skillfully ties the material together, recognises alternative

perspectives and uses examples where possible.

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Documents

EC8005b Lecture 10 2014 - Trinity College Dublin · USA: Inequality rose in 2nd thhalf of 19 C, declined over the 20th C and rose again after 1970. Kuznets curve seemed to fit. UK: