EKN 310
Chapter 5 – Equity and Social welfare
Introduction
Previously: Chapter 3&4 described and addressed market failures.
Now: Chapter 5 deals with market failures specifically concerning the
distribution of wealth or income in society.
There are 2 tools for assessing welfare eDects of public policy…
- Pareto Criterion: Policy-induced change is only justified only if it improves
the welfare of at least one member of society, without harming others.
- Bergson Criterion: Policy-induced change can improve welfare even when
an individual is left worse oD, provided the overall societal welfare
improves. (broader)
In this chapter we will focus on both criteria.
Nozick’s Entitlement Theory
The Pareto Criterion is commonly associated with the libertarian approach to
public policy.
Libertarian Approach to Public Policy:
• Views individual freedom as the primary objective of society.
• Libertarianism focuses on maximising “negative freedom” (meaning
protecting individuals from the coercion by others).
• Under this approach, the preferred economic system is laissez-faire
(government intervention is minimal).
• The role of government is mainly that of a caretaker – responsible for
protecting individual freedom and property rights, rather than distributing
resources.
, • Libertarians are generally opposed to distributional or redistributive
policies – because these policies interfere with individual freedom and
voluntary market outcomes.
Exception to the Libertarian Position = Nozick’s Entitlement Theory:
• Robert Nozick’s entitlement theory provides a framework for determining
whether a distribution of resources is just.
• According to Nozick, a distribution is just if it arises from a prior just
distribution through just means.
• He explains this using 3 principles of justice…
1) Principle of Justice in Acquisition
> This determines how individuals can initially acquire property.
> Individuals are only allowed to acquire things that do not already
belong to others, provided that the acquisition does not make
others worse oD than they were before acquisition.
> ‘things’ = refers to property and capital goods only
> Labour income is excluded, because Nozick considers it an
inalienable individual right linked to a person’s natural abilities and
eDort.
2) Principle in Justice of Transfer
> Once property has been acquired justly, it can be transferred
between individuals only through voluntary means.
> Legitimate transfers include gifts, grants, bequests or voluntary
exchange in the market.
> As long as transfer is voluntary and consensual, the resulting
distribution of holdings remains just.
3) Principle of Rectification of Injustice Holdings
> If either justice in acquisition or justice in transfer has been violated,
then an injustice in holdings has occurred, giving rise to this
principle.
> In such cases, redistribution of wealth may be justified but only to
rectify the injustice.
> The purpose of redistribution is to restore individuals to the position
they would have been in, had the injustice not occurred.
Chapter 5 – Equity and Social welfare
Introduction
Previously: Chapter 3&4 described and addressed market failures.
Now: Chapter 5 deals with market failures specifically concerning the
distribution of wealth or income in society.
There are 2 tools for assessing welfare eDects of public policy…
- Pareto Criterion: Policy-induced change is only justified only if it improves
the welfare of at least one member of society, without harming others.
- Bergson Criterion: Policy-induced change can improve welfare even when
an individual is left worse oD, provided the overall societal welfare
improves. (broader)
In this chapter we will focus on both criteria.
Nozick’s Entitlement Theory
The Pareto Criterion is commonly associated with the libertarian approach to
public policy.
Libertarian Approach to Public Policy:
• Views individual freedom as the primary objective of society.
• Libertarianism focuses on maximising “negative freedom” (meaning
protecting individuals from the coercion by others).
• Under this approach, the preferred economic system is laissez-faire
(government intervention is minimal).
• The role of government is mainly that of a caretaker – responsible for
protecting individual freedom and property rights, rather than distributing
resources.
, • Libertarians are generally opposed to distributional or redistributive
policies – because these policies interfere with individual freedom and
voluntary market outcomes.
Exception to the Libertarian Position = Nozick’s Entitlement Theory:
• Robert Nozick’s entitlement theory provides a framework for determining
whether a distribution of resources is just.
• According to Nozick, a distribution is just if it arises from a prior just
distribution through just means.
• He explains this using 3 principles of justice…
1) Principle of Justice in Acquisition
> This determines how individuals can initially acquire property.
> Individuals are only allowed to acquire things that do not already
belong to others, provided that the acquisition does not make
others worse oD than they were before acquisition.
> ‘things’ = refers to property and capital goods only
> Labour income is excluded, because Nozick considers it an
inalienable individual right linked to a person’s natural abilities and
eDort.
2) Principle in Justice of Transfer
> Once property has been acquired justly, it can be transferred
between individuals only through voluntary means.
> Legitimate transfers include gifts, grants, bequests or voluntary
exchange in the market.
> As long as transfer is voluntary and consensual, the resulting
distribution of holdings remains just.
3) Principle of Rectification of Injustice Holdings
> If either justice in acquisition or justice in transfer has been violated,
then an injustice in holdings has occurred, giving rise to this
principle.
> In such cases, redistribution of wealth may be justified but only to
rectify the injustice.
> The purpose of redistribution is to restore individuals to the position
they would have been in, had the injustice not occurred.
