Public Finance, 2nd Edition

gain utility. In eVect, the government is satisfying the interpersonal equity

conditions indirectly. Presumably there exists a redistribution of the Wxed

resource that satisWes the interpersonal equity condition for one of the variable

goods or factors (say, X

g

). But if (qW/qU

h

)(qU

h

/qX

hg

) q

g

, all

h  1, ..., H, and pareto optimality holds, then the interpersonal equity

conditions hold for all variable goods and factors. Thus, the existence of a

Wxed factor gives the government the leverage it needs to satisfy the interper-

sonal equity conditions, even though they are deWned in terms of the variable

goods and factors.

Finally, it may simply be assumed that the good or factor being trans-

ferred is serving as the numeraire, such that its price is equal to one at any

general equilibrium. Competitive market economies determine pareto-

optimal allocations of resources in terms of relative prices; the absolute

price level is entirely arbitrary. Thus, it is always possible to single out a

good or factor, set its price equal to one, and solve for the values of all other

prices in terms of the one Wxed price. If the numeraire good is chosen for

redistribution, unit transfers of it are equivalent to unit transfers of purchas-

ing power or ``real'' income. This is the most general interpretation of

``income'' and the most common one.

One Wnal comment on equity is in order, a reminder pertaining to the

goal of process equity. The interpersonal equity conditions have nothing to

do with process equity norms; they relate strictly to the goal of end-results

equity, of achieving a just distribution of income. As noted earlier, the

competitive market system is relied on to achieve process equity by promot-

ing equal opportunity and social mobility. Our baseline, social planner model

has nothing explicit to say regarding process equity, as is true of most models

used in public sector economics.

POLICY IMPLICATIONS AND CONCLUSIONS

The principal task in Chapter 2 was to present a baseline version of the

standard general equilibrium model used in normative public sector analysis.

Nonetheless, the discussion of the interpersonal equity conditions and lump-

sum redistributions generated a number of fundamental prepositions relating

to the goal of end-results equity:

1. If society cares about distributive equity, it must establish a govern-

ment to carry out its wishes. A perfectly functioning competitive market

economy generates an eYcient (pareto-optimal) allocation of resources, but

even the most perfect market system is neutral regarding the question of end-

results equity.

2. Society's norms regarding distributive justice can be represented ana-

lytically by a Bergson±Samuelson individualistic social welfare function,

62 POLICY IMPLICATIONS AND CONCLUSIONS