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Redistributing Income in Theory• Utilitarian model of redistribution.

• Assume that each individual’s utility u is a function of money income m: u=u(m).

• Maximize total utility of all persons in society.

• W = ui(mi).

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Utilitarian Model of Redistribution

• Optimization leads to the requirement that marginal utilities for all persons must be equal.

• In the two person case:

• Mua = MUb

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Figure 5.2: An Equal Distribution of Income

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Figure 5.3: An Unequal Distribution of Income

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Figure 5.4: Optimal Income Distribution When People Are Different

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Figure 5.5: Social Welfare Function Contours When Individuals’ Utilities Are Perfect Substitutes

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Figure 5.6: Social Welfare Function Contours

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Figure 5.7: Social Welfare Contours in the Rawlsian Case

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Figure 5.8: Social Welfare Maximization