Question

Consider a society consisting of two people. Paolo earns an income of $85,000 per year and Sharon earns an income of $30,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Paolo's income and give the revenue to Sharon.

Without any incentive distortion, Paolo would retain $63,750 and Sharon would end up with $51,250. However, let us assume that since Paolo will not receive all the income he earns, he decides to work less and earn an income of only $75,000, of which 25%×$75,000=$18,75025%×$75,000=$18,750 will be owed in taxes.

With the redistribution plan, Paolo will take home an income of

.

The $18,750 that Paolo pays in taxes will be transferred by the government to Sharon. Let us assume that since Sharon now receives payment from the government, she will not work as many hours and will earn an income from work of only $29,000 instead of her initial $30,000.

With the redistribution plan, Sharon's total income (including the government payment received) is now

.

Without a redistribution plan, total income in this society is

. After the redistribution plan is implemented, _total income in this society is

. Therefore, the redistribution plan _total income in this society.

According to the utilitarian political philosophy, the $18,750 transferred from Paolo to Sharon will benefit Sharon than it hurts Paolo. Which of the following statements is true according to this philosophy?

The government should not institute the plan because it has no right to take money from one person and give it to another.

The government should definitely institute the plan because it will increase overall utility.

The redistribution may or may not be desirable, depending on the relative magnitude of the utility gain and the efficiency loss.

Answer 1

In the new redistribution, Paolo will take home an income of

75000-18750= 56250

Sharon will take home an income of

29000+18750= 47750

Without a redistribution plan, Paolo wouldve earned 85000 while Sharon wouldve earned 30000. So,

Total income of the society=85000+30000=115000

After the redistribution pla, Paolo earns 56250 and Sharon will get 47750. So,

Total income of the society=56250+47750= 104000

According to the utilitarian political philosophy, the $18,750 transferred from Paolo to Sharon will benefit Sharon more than it hurts Paolo.

Lets first see what utilitarianism is. A utilitarian philosophy aims for the betterment of society as a whole. With this in mind, we can see that the correct option is B- The government should definitely institute the plan because it will increase overall utility.