Tradeoff Society Faces Is Between

¶ … tradeoff society faces is between efficiency and equality. Elaborate each term with suitable examples. If the government in your country redistributes income from the rich to the poor, analyze with how this action affects equality as well as efficiency in the economy of your country.

One principle of economics holds true, across both countries and ages: the rich tend to get richer and the poor tend to get poorer. The rich have more money to invest, to seek an education, have access to better sources of information to find jobs and ways to invest their money, can own rather than rent property, and have greater influence upon how tax policy is written because of their influence in government. "Somewhat fancifully, one can even imagine replicating it in a laboratory. For instance, we give Rat a an amount of cheese equal to twice his normal caloric needs, while Rat B. receives only a subsistence diet during the same initial time period. Rat a consumes some of his excess allocation, but also saves some. If we assume interest-bearing cheese, the dynamics of a growing disparity in wealth take off exponentially. And if Rat a mates exclusively at the local rat country club, and sends his little rat progeny to the best rat schools, where they learn the best techniques for maze-running, thereby winning still more cheese, we would surely obtain by no later than the third generation a group of young rats who, to paraphrase the words of Jim Hightower, are born on third base and think they've hit a triple" (Schmalbeck 2009).

A purely 'hands-off' strategy theoretically enhances economic efficiency because of an absence of market constraints, but perpetuates a system of social constraints upon the poor that are inequitable. To allow such an imbalance to perpetuate itself would cause profound social instability, especially in a nation ostensibly devoted to democratic ideals such as America. This is why a progressive income tax system deducts a greater proportion of money from the incomes of the wealthy than from the poor, and real estate taxes are placed upon property owners, rather than renters who cannot profit from property ownership. There is another advantage to society for this policy: since the poor spend a larger proportion of their income upon goods and services, allowing them to keep a greater proportion of their earned wealth can better stimulate the economy than can tax breaks accorded to the wealthy. One of the causes of the Great Depression was the disparity between wealthiest and poorest members of society -- more goods and services were being produced than the average person had money to purchase.

Efficiency theory suggests that specialization and economies of scale produce the best results, thus taxing the wealthy and other wealth distribution policies are inefficient. A school of thought called supply-side economics even proposes giving tax breaks to the wealthy, so the richest members of society will be able to invest more money into the economy. However, the rich may be just as apt to save their new-found largesse and use it for long-term gains rather than to use it in the service of immediate economic stimulation and growth.

The theory known as the Laffer Curve proposed that as rates rise, after a certain point, income derived from taxation declines, presumably as more people avoid paying taxes, given that it is not worth the effort to work, or they find ways to evade the IRS. The latter is more likely, given that the wealthy derive the largest proportion of their income from capital gains, which are easier to conceal as opposed to employment income. The supposed balance between efficiency and equality, however, "depends on sharp behavioral responses -- which erode or augment the tax base -- to rate changes. But the recent research suggests modest, or even non-existent, responses" to rate changes (Schmalbeck 2009). The magnitude of response of rich and poor individuals to changes in rates of taxation remains debatable -- the degree to which higher rates of taxation will promote evasion and discourage investment remains a controversial subject amongst economists, hence the different prioritization given to efficiency vs. equality in different economic theories.

Q2: a) Using the graph shown, analyze the effect a $300 price ceiling would have on the market for ten-speed bicycles. Would this be a binding price ceiling? b) Using the graph shown, analyze the effect a $700 price floor would have on this market for ten-speed bicycles. Would this be a binding price floor? c) Why would policymakers choose to impose a price ceiling or price floor?

A price ceiling upon ten-speeds would increase demand for bicycles, given how inexpensive this price would be for many high-end bicycles. This mandatory price cut would also decrease the incentive to produce bicycles. It would strangle the luxury bicycle market, as producing ten-speeds of a certain level of quality vastly exceed that of $300. It would have less of an effect on toy store quality bicycles; although to some extent it would limit bargain bicycle companies' ability to compete on price, as mid-level priced cycles would be forced to hover closer to the $300 mark than before. But in general, "Ii the price ceiling is above the market price, then there is no direct effect," and is not considered a binding or impositional price floor (Price ceilings and floors, Investopedia, 2009).

If the price ceiling is set below the market price, there will likely be a shortage, as sellers will have less of an incentive to produce at such a low level of return. This will likely mean that the quantity demanded will exceed the quantity supplied, resulting in black markets and waiting in long lines for the goods (Price ceilings and floors, Investopedia, 2009) Protectionism begets protectionism: budding Lance Armstrong's might go abroad to get better bicycles, and there may be a call to bar them from taking the bicycles back into the U.S.

A price floor at $700 would have no effect on the luxury bike market, but it would make cycling prohibitively expensive for many individuals and thus be a binding price floor for most ordinary cyclists. Furthermore, such a floor could, over the long-term, severely debilitate the cycling industry, as teens and recreational cyclists would have difficulty finding affordable bicycles to ride. "When a 'price floor' is set, a certain minimum amount must be paid for a good or service. If the price floor is below a market price, no direct effect occurs. If the market price is lower than the price floor, then a surplus will be generated" (Price ceilings and floors, Investopedia, 2009). There would be a surplus of bicycles, priced too high for their relative quality.

Despite the negative effects upon the bike market in this example, there are many good reasons to set price floors and ceilings in some instances. For example, in the agricultural industry, the market may become flooded with a particular crop, if weather conditions were very favorable for production -- farmers often over-plant, given that they do not know how much of their crop may be destroyed by blights, insects, or inclement weather. The result can be over-production, and often a price point that does not provide the farmer with an adequate profit to plant for the following year. A price floor keeps farmers 'in business' so they can provide food for consumers over the long-term.

The minimum wage, which ensures that people will receive adequate compensation for their labor and still be able to live, is another example of a price floor -- it prevents the cost of labor being driven so prohibitively low that people cannot support themselves and/or have little incentive to work. Conversely price ceilings may be necessary when sellers have a great deal of power in times of scarcity, if there is a famine (for example, if the city is blockaded during wartime) or a there is a shortage of a vital resource such as gas or steel, especially during wartime when these goods are vital to the preservation of the nation. Price ceilings prevent sellers from taking advantage of the majority's misery.

Q5. Evaluate how a country's policies influence its productivity growth. You are required to bring examples and academic references to support your answer.

At present, the U.S. is in a recession and it thus desperate to spur its productivity. Keeping interest rates low is one way to enhance economic growth. If interest rates are low, people are more likely to borrow money to spend on goods and services. This in turn, encourages businesses to spend more money, generating inventory and investments in technology. Businesses can also borrow money from banks at cheaper rates of interest to invest in their own infrastructure. The government can also influence the money supply, the circulating capital available to purchase goods and services in the economy, by printing money and through the buying and selling of government securities. Conversely, sometimes it may be necessary to contract the supply of available capital, rather than to expand it, to prevent inflation.

Productivity can also be influenced by tax cuts. Cutting taxes can enable consumers to buy more goods and services, and enable companies to produce more and to invest more in their enterprises. Productivity can also be limited or enhanced by regulation. In the short-term, less regulation tends to increase productivity but makes prices and wages less stable. In the long run, not enough regulation can have a counter-productive effect, as occurred with the lack of regulation over the banking industry and the subsequent credit crisis of 2008. Deregulation and a failure of oversight can also incentivize corruption