Should income inequality be praised? Multiple public goods provision, income distribution and social welfare

Tax Administration Research Centre (TARC)

Further details

We investigate how income inequality affects social welfare in the model of voluntary contributions to multiple pure public goods. Itaya, de Meza and Myles (1997) have shown that maximization of social welfare precludes income equality in the model of a single pure public good. In contrast, we show that the result of Itaya et al. may not be valid in the presence of multiple voluntarily supplied public goods; namely, an income equalizing redistribution policy may raise social welfare. We also show the possibility that if the income distribution is extremely unequal, then altruistically motivated voluntary transfers occur and thus inequality-raising redistribution policy will be neutralized whereby leaving social welfare unchanged.