Efficient Social Welfare Function and Optimal Income Distribution

OU Department of Economics Working Paper No. 02-1

43 Pages Posted: 27 Mar 2002  

Jiandong Ju

University of Oklahoma - Department of Economics

Date Written: March 2002

Abstract

By showing that increases in the sum of aggregate income and aggregate Marshallian consumer surplus represent potential Pareto improvement, this paper builds a theoretical ground for using aggregate Marshallian consumer surplus as a social welfare indicator. The optimal income distribution that potentially Pareto dominates any other income distribution is studied. It is shown that the income distribution is optimal if and only if the marginal aggregate Marshallian consumer surplus of income is equalized across all consumers. An index that measures income distribution non-optimality rather than inequality is then developed. It is found that the social cost of income distribution non-optimality in a perfect competitive market could be surprisingly high. Finally, a new approach of social welfare function is developed and it is shown that a social welfare function can be expressed by the sum of aggregate income and aggregate Marshallian consumer surplus if and only if the marginal social welfare of a good is equal to its market price.

Keywords: Aggregation, Consumer surplus, Income distribution, Pareto principle, Social welfare

JEL Classification: C43, D6, H2

Suggested Citation

Ju, Jiandong, Efficient Social Welfare Function and Optimal Income Distribution (March 2002). OU Department of Economics Working Paper No. 02-1. Available at SSRN: https://ssrn.com/abstract=304680 or http://dx.doi.org/10.2139/ssrn.304680

Jiandong Ju (Contact Author)

University of Oklahoma - Department of Economics ( email )

729 Elm Avenue
Norman, OK 73019-2103
United States
405-325-5492 (Phone)
405-325-5842 (Fax)

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