Instructor Name: Muhammad Yasar

GENERAL EQUILIBRIUM
LECTURE # 28
MSC ECONOMICS (EVE)
4TH SEMESTER

Prepared by Muhammad Yasar

 Source: Chapter # 3 , Microeconomic Theory by
Walters and Layard
AIMS AND OBJECTIVES
 Interpersonal redistribution of Income
 Net Benefit of Tax

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 Elasticities to progressiveness
INTERPERSONAL REDISTRIBUTION
 When we need to see the change on budgetary level
we need to define some more principles
 So, on three levels we have to rethink

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1. Distribution between individuals

2. More than two factor of productions

3. One individual may own more than one factor at

a time
CONT..
 In general we need to have some inequality measure
 This will help us to see the impacts of any tax rise on
the people budget

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 We already done with it in previous lectures

1. Lorenz Curve

2. Bentham’s approach
CONT..
 So, we just focus on the impacts of tax policy
 There are two tax policies

1. Progressive policy

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2. Regressive policy

 If the tax rate rises with the rise in income then it’s
a progressive policy and vise versa for regressive
policy
 Another striking concept is net benefit

Net Benefit = Benefit of tax – Cost of tax

CONT..
 One definition of the benefit is the people who are
receiving the tax collection amount like subsidy.
 The cost will be like the amount which people have

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to cut from their consumption.
 So, to develop a sufficient condition we have

 Left hand side is any change in net benefit with

respect to income
CONT..
 Right hand side is like the change in benefit may be
less than the change in cost
 So, greater the cost symbolically means larger tax

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net
 Even though we can also say that rich also the
beneficiary of the tax

 Still as the cost increases means higher the income

in the economy higher will be the tax
 So, its progressive
ELASTICITY AND PROGRESSIVENESS
 Elasticities are important in terms of budgetary
decisions
 If the benefits and cost both follows the same

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property of progressiveness or regressiveness then
policy in net terms will be same as well
 We need to see it when benefit and cost of different
properties.
 Lets consider it with the help of an example
EXAMPLE

 Assume there is a normal good

 A subsidy given on its price
 This subsidy is financed by the poll tax ( a tax on

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everyone in a fixed sum)
 Now a higher income earner will purchase more of
the product and enjoy more subsidy
 So, the cost is regressive and benefits are
progressive
 Also the intensity (elasticity) of benefit is less than
the cost
CONCLUSION

 So, its not that simple as it seems

 The quest of optimal tax rate is still to reach its
destination

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 Always in a tax policy we have to see the outcomes
against the theories
 We need some serious research in this topic
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THANK YOU