<p>Firstly, let us fix the mode of taxation as <strong>lump-sum taxes</strong>. This means that after the redistribution we will still have an efficient allocation assuming there are no externalities.</p>

<p>Next, think about what happens to each individuals' <strong>income</strong>. Individuals with a high demand elasticity for the good will in general be taxed less than individuals with a low demand elasticity. If the demand elasticity is unrelated to the original income level, this means that this mode of taxation does not necessarily increase equality in income across individuals.</p>

<p>This may not be bad, because the redistribution may still be <strong>welfare</strong> enhancing if the marginal utility of income of high elasticity individuals is higher than the marginal utility of income of low elasticity individuals. However, we know that marginal utilities are unrelated to demand, since one can always apply any monotone transformation to the utility function and obtain the same demand functions. Thus, both equality of income and welfare effects are unclear.</p>

<p>Finally, we may consider what happens to <strong>demand</strong> in that particular market. Again, the effects are unclear. This time, it is the presence of income effects which obfuscate the picture. An individual with a positive income transfer may consume more or less of the good, depending on whether it is an inferior good or not.</p>

<p>In this answer, we have thus seen that without making stronger assumptions on preferences, we cannot say much about the effects of such a redistribution even if we assume lump-sum redistribution. If we go into second-best analysis, things may get even more complicated.</p>

CC BY-SA 3.0
2015-11-09T02:22:29.430Z
2015-11-09T02:22:29.430Z
HRSE
<p>Suppose that there is a market with a large number of consumers and producers. Assume that the government knows the reservation prices of  all people in the market. Suppose that the government uses this information to tax all the consumer and producer surplus created in the market (by making everyone pay or receive the reservation price). The government distributes the total welfare equally to everyone. </p>

<p>What effect would this have on the economy compared to the situation without government intervention?</p>

CC BY-SA 3.0
2015-11-08T21:19:10.370Z
Is this welfare distribution somehow different from simply distributing incomes equally?
Giskard
CC BY-SA 3.0
2015-11-08T22:56:06.253Z
@denesp I'm not sure I understand your feedback. The scenario I'm trying to describe is one where all consumer and producer surplus is evenly distributed, which is not necessarily income. Firstly, consumer surplus is not counted in income, and secondly, for an individual, the income is the reservation price of the labor plus the producer surplus.
InquisitivePerson
CC BY-SA 3.0
2015-11-08T23:14:52.430Z
I thought we do measure consumer surplus in income. What do you think we should measure it in? (If we do, it still seems to me that this is equal income distribution, if not, I don't know.)
Giskard
CC BY-SA 3.0
2015-11-08T23:36:59.853Z
I see; I thought by income you meant an individual's total earnings, not income in the sense of value of goods and services consumed minus opportunity costs. Yes, I am proposing an equal income distribution.
InquisitivePerson
CC BY-SA 3.0
2015-11-09T00:11:49.097Z
I do mean total earnings, I think the two redistributions result in the same thing.
Giskard
CC BY-SA 3.0
2015-11-09T00:45:49.663Z
I still don't follow. Suppose in a market a consumer buys a good for \$5 and has a reservation price of \$7, while the producer's reservation price is \$3. The producer's total earnings are \$5, if I am understanding correctly. The redistribution I am describing is where the government makes the consumer pay \$7 and the producer gets \$3. The surplus of \$4 is distributed evenly.
InquisitivePerson
CC BY-SA 3.0
2015-11-09T00:47:37.007Z
Let us [continue this discussion in chat](http://chat.stackexchange.com/rooms/31289/discussion-between-inquisitiveperson-and-denesp).
InquisitivePerson
CC BY-SA 3.0
2015-11-09T01:58:06.720Z
@denesp, I think you would need to show this hypothesis more formally. In fact, it seems plainly wrong for heterogeneous consumers. If one person starts out with a lot of money but very elastic demand for each good, this person is taxed very little compared to another person with very inelastic demand and little income.
HRSE
<microeconomics><public-economics><welfare-economics>
What would happen if total welfare were evenly distributed?
InquisitivePerson
# What would happen if total welfare were evenly distributed?

(Asked by: username_0 on 2015-11-08)

Suppose that there is a market with a large number of consumers and producers. Assume that the government knows the reservation prices of all people in the market. Suppose that the government uses this information to tax all the consumer and producer surplus created in the market (by making everyone pay or receive the reservation price). The government distributes the total welfare equally to everyone.

What effect would this have on the economy compared to the situation without government intervention?

**Tags:** microeconomics, public-economics, welfare-economics
> **Comments:**
> **username_1**: Is this welfare distribution somehow different from simply distributing incomes equally?  
> **username_0**: @denesp I'm not sure I understand your feedback. The scenario I'm trying to describe is one where all consumer and producer surplus is evenly distributed, which is not necessarily income. Firstly, consumer surplus is not counted in income, and secondly, for an individual, the income is the reservation price of the labor plus the producer surplus.  
> **username_1**: I thought we do measure consumer surplus in income. What do you think we should measure it in? (If we do, it still seems to me that this is equal income distribution, if not, I don't know.)  
> **username_0**: I see; I thought by income you meant an individual's total earnings, not income in the sense of value of goods and services consumed minus opportunity costs. Yes, I am proposing an equal income distribution.  
> **username_1**: I do mean total earnings, I think the two redistributions result in the same thing.  
> **username_0**: I still don't follow. Suppose in a market a consumer buys a good for \$5 and has a reservation price of \$7, while the producer's reservation price is \$3. The producer's total earnings are \$5, if I am understanding correctly. The redistribution I am describing is where the government makes the consumer pay \$7 and the producer gets \$3. The surplus of \$4 is distributed evenly.  
> **username_0**: Let us [continue this discussion in chat](http://chat.stackexchange.com/rooms/31289/discussion-between-inquisitiveperson-and-denesp).  
> **username_2**: @denesp, I think you would need to show this hypothesis more formally. In fact, it seems plainly wrong for heterogeneous consumers. If one person starts out with a lot of money but very elastic demand for each good, this person is taxed very little compared to another person with very inelastic demand and little income.  

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## 1 answers

### Answer by username_2 on 2015-11-09. Score: 1

Firstly, let us fix the mode of taxation as **lump-sum taxes**. This means that after the redistribution we will still have an efficient allocation assuming there are no externalities.

Next, think about what happens to each individuals' **income**. Individuals with a high demand elasticity for the good will in general be taxed less than individuals with a low demand elasticity. If the demand elasticity is unrelated to the original income level, this means that this mode of taxation does not necessarily increase equality in income across individuals.

This may not be bad, because the redistribution may still be **welfare** enhancing if the marginal utility of income of high elasticity individuals is higher than the marginal utility of income of low elasticity individuals. However, we know that marginal utilities are unrelated to demand, since one can always apply any monotone transformation to the utility function and obtain the same demand functions. Thus, both equality of income and welfare effects are unclear.

Finally, we may consider what happens to **demand** in that particular market. Again, the effects are unclear. This time, it is the presence of income effects which obfuscate the picture. An individual with a positive income transfer may consume more or less of the good, depending on whether it is an inferior good or not.

In this answer, we have thus seen that without making stronger assumptions on preferences, we cannot say much about the effects of such a redistribution even if we assume lump-sum redistribution. If we go into second-best analysis, things may get even more complicated.


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