Distributional Effects

Chris Jones

in Applied Welfare Economics

Published in print May 2005 | ISBN: 9780199281978
Published online July 2005 | e-ISBN: 9780191602535 | DOI:
Distributional Effects

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Once consumers are assigned different distributional weights, it is possible for policy changes with efficiency losses to raise social welfare by ’improving’ the distribution of income. Two approaches can be used to account for distributional effects. The first, which is recommended by Dre_ze and Stern (1990), multiplies the dollar change in utility for each consumer by their distributional weight and sums them. Many analysts are reluctant to allow their subjective assessments about the weights to play such an important role in policy evaluation. Bruce and Harris (1982) and Diewert (1983) avoid this problem by using the compensation principle to convert efficiency gains into Pareto improvements. Whenever governments balance their budgets, they must choose how to transfer revenue across consumers, and by choosing patterns of transfers to make the personal shadow value of government revenue positive for every consumer, there are strict Pareto improvements from aggregate dollar gains in utility.

Keywords: distributional characteristics; distributional effects; efficiency effects; Pareto improvements; personal shadow value of government revenue

Chapter.  6758 words.  Illustrated.

Subjects: Public Economics

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