Suppose that there are two income groups, the rich (r) and the poor (p). Each utility...

 

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Suppose that there are two income groups, the rich (r) and the poor (p). Each utility function is denoted by u; = ln (mi) where m₁ is income for i = r,p. According to Okun's leaky bucket, there are efficiency costs of redistribution represented by a constant marginal cost c (c > 0). Under the distorting taxes and transfers, define the efficiency costs and justify inequality in income distribution. Suppose that there are two income groups, the rich (r) and the poor (p). Each utility function is denoted by u; = ln (mi) where m₁ is income for i = r,p. According to Okun's leaky bucket, there are efficiency costs of redistribution represented by a constant marginal cost c (c > 0). Under the distorting taxes and transfers, define the efficiency costs and justify inequality in income distribution.