Income Equality and Efficiency - Video Tutorials & Practice Problems
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Income Equality and Efficiency
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Alright. So now let's see the relationship between equality and efficiency. So let's talk about income inequality versus income efficiency. All right. In the case of perfect equality, right? If everything was perfectly equal, we're gonna maximize what we call the total utility of the population. Okay. So this utility, of course, in economics and math, we always want to quantify everything. So utility is gonna be a quantitative measure of happiness or satisfaction. Okay. So obviously this is kind of a really abstract topic, but it helps us make some conclusions. This is kind of the idea of saying something like, oh man, I'm gonna eat this slice of pizza. It's giving me 100 units of utility right now, right? It's really weird to think about, but it helps us to make our calculations. Alright. So it's really abstract, you can't really say how many units of utility you get from something, but we can make some conclusions about utility itself. All right. So we're gonna talk about marginal utility and marginal utility. It's gonna be marginal. Right? One more. When we talk about marginal, we're talking about one more. So, what's the additional utility? The additional satisfaction from consuming one more unit? Right? Or in this case spending one more dollar, Right? Because we're talking about income equality here. So, if we're going to spend one more dollar, how much extra happiness are we gonna get? And as we've seen with many other topics, we're gonna have the diminishing returns come back into play here, right? As we spend more and more dollars, we're going to get less utility from each dollar we spend. Let's think about back to pizza that first slice of pizza you eat, it's gonna bring you a lot of utility because you're hungry because you love pizza. The second slice, it's still good. But think about that first bite of pizza, how much better it was than when you're just eating more pizza. Third slice, four slice, you're getting less and less satisfaction as you eat more and more of it. Right? So that's gonna have that diminishing returns that we're talking about. So let's think about this example economy where we've got just two people. Let's keep it simple. We've got a Iran and block. I got these names from this hilarious key and peele sketch I was I had just watched like five minutes before and it's the substitute teacher sketch on key and peele type it into youtube. It was really funny. Um So we've got a a Ron earning $2500 and blake earning excuse me? Ballack earning $7500. Right? So there's an equal income here, Aaron's only earning 2500 black is earning 7500. So what's gonna happen if the government say collects all the revenue, they take the money from a Iran, they take the money from black and they spread it evenly. Everyone gets the same amount. Well, let's see how this affects their utility. All right. So here we've got two graphs, one for a a Ron one for black and let's see where we started. Aaron was originally earning $25,000, right? And notice that these curves, we've got a marginal utility curve that's downward sloping, right? It has this downward slope because of the diminishing returns, right? Every extra dollar you spend, you're gonna get less satisfaction. Think about superstars, right? If they've got 12 cars in their garage, think about what it's gonna how much happiness they get from buying 1/13 car? Probably not as much happiness as someone buying their first car, right? There's gonna be this difference. So let's let's extend that here, Aaron's got 2500 where black has got 7500 notice right here already. The marginal utility that Aaron would get from one more dollar is much more than the marginal utility that Ballack would get from one more dollar, Right? Because he's already much further down in his diminishing returns. So, if the guy government to collect all the revenue and distribute it evenly. Well, let's see what would happen. There's 10,000 in total revenue, right? There was 2500 and 7500 that gives us 10,000 total. So, if they split it evenly, everyone would get 5000. So first let's talk about a Ron over here. He would move from here to here. Right? So he would be getting all that extra utility from spending each dollar And this right here that I'm shading. We could say this is the extra utility he's getting alright. The extra utility gained utility? I'm gonna put here from getting that extra money right the government collected and he earned he got extra money that originally was black and black was over here at 7500 and he's gonna go down to 5000 so he's losing some money, right? And I'll do this one in red. So we got this and this red seems like a lost kind of color. So there we go. This is the lost utility, right? Lost utility. But notice that the utility that block a lost is less than the gained utility by Aaron right? And this has to do with where they were on their marginal utility curve. Right? So in total if we think about the total utility in the in the nation, well now there's more total utility, right? Because the gain from Aaron is more than the loss from block there. Alright, So there is the positive side of this income equality. Where we have the maximum amount of utility in theory going on there. Right? But what happens is we have this case of perfect equality. We're gonna have the lack of incentive. We've talked about this before and we're gonna see this again in perfect equality. The population lacks the incentive to work hard if I'm gonna make the same amount of income. Whether I work really hard or if I don't work and the government's just gonna collect everything and just hand me my paycheck, regardless of what I do. Why should I work hard? I could just go to the beach all day and I'm gonna make the same amount of money as if I had gone to work every day and struggled really hard. Right? So this perfect equality. It gives up efficiency, right? Greater equality comes at the price of of reduced efficiency, right? And we say that this is the opportunity, cost, the opportunity, cost of equality is efficiency. And this is what we call the equality efficiency tradeoff. Alright, That's about it here, let's go ahead and move on to the next video.