Question

For each of the following policy changes and program proposals, explain why the change is or is not likely to be a Pareto improvement: 1)Protecting the automobile industry from cheap foreign imports by imposing quotas on the number of imported cars; 2) Increase Social Security benefits, finance by an increase in the payroll tax; 3) Replacing the primary reliance at the local level on the property tax with state revenues obtained from an income tax; 4) Eliminating Affordable Care Act and replacing it with a new health care program, which fewer are able to afford, but the savings are being achieved as the program cost increases are paid through cuts to other federally funded programs.

In each case, state who the winners and who the losers are likely to be. Which of these changes might be approved under the compensation schedule? Use your budgetary expert hat to think tradeoff between efficiency and inequality. Can we make improvements that will increase efficiency and equity at the same time?

Answer 1

1) it is not pareto improvement as, consumers will face loss in this condition as they would have to pay more for their choices. Hence, it is not overall welfare.

2)social security benefit needs not be necessarily used by all, unlike payroll tax which has to be paid by all. Hence, it is not overall welfare.

It could get better if govt makes sure the benefits of social security are being enjoyed by all.

3) income tax is not same for all, but different for different earning groups. Hence, it would be less profitable for higher income earning class, as they would have to pay more.

4) it wouldnt be achievable by all, whereas the funds invested in it by the government belongs to all. Hence, it is not overall benefit.

It could be improved if, the new program is made affordable to all.