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Fairness in Markets and Government Policies

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  • Shinji Yamashige
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    Abstract

    An allocation is said to be ``weakly envy-free'' if there is no individual who envies others with the same or smaller endowments. The requirement is a necessary condition for an allocation to be envy-free [Foley (1967)]. We show that competitive equilibrium allocations in exchange economies are weakly envy-free, i.e., this weak notion of fairness is achieved in markets. Since governments are expected to improve fairness in economies, it seems natural to require government policies satisfy this minimum requirement, which we refer to as no-envy criterion. We show that well-known equity criteria for government policies need not satisfy the no-envy criterion. Since the benefit tax (e.g., Lindahl tax) in general does not satisfy the no-envy criterion either, we argue that it is not a fair tax to finance pure public goods and show a result which supports income tax and commodity tax as fair taxes. The result suggests that the no-envy criterion may be indeed adopted by governments as an equity criterion. It is also argued that when public goods are not pure the benefit tax must be introduced because the income tax and the commodity tax no longer satisfy the no-envy criterion.

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    File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-YAMASHIG-95-03.ps
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    Bibliographic Info

    Paper provided by University of Toronto, Department of Economics in its series Working Papers with number yamashig-95-03.

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    Length: 37 pages
    Date of creation: 09 Sep 1995
    Date of revision:
    Handle: RePEc:tor:tecipa:yamashig-95-03

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    Related research

    Keywords: Fairness; Competative Equilibrium; Government Policy;

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    1. H. R. Varian, 1975. "Two Problems in the Theory of Fairness," Working papers 163, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Musgrave, Richard A., 1990. "Horizontal Equity, Once More," National Tax Journal, National Tax Association, vol. 43(2), pages 113-22, June.
    3. Sato, Toshihiro, 1987. "Equity, fairness and lindahl equilibria," Journal of Public Economics, Elsevier, vol. 33(2), pages 261-271, July.
    4. Varian, Hal R., 1974. "Equity, envy, and efficiency," Journal of Economic Theory, Elsevier, vol. 9(1), pages 63-91, September.
    5. "Sato, Toshihiro", 1985. "Equity and Fairness in an Economy with Public Goods," Economic Review, Hitotsubashi University, vol. 36(4), pages 364-373, January.
    6. Thomson, William, 1982. "An informationally efficient equity criterion," Journal of Public Economics, Elsevier, vol. 18(2), pages 243-263, July.
    7. SCHMEIDLER, David & VIND, Karl, . "Fair net trades," CORE Discussion Papers RP -131, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. King, Mervyn A, 1983. "An Index of Inequality: With Applications to Horizontal Equity and Social Mobility," Econometrica, Econometric Society, vol. 51(1), pages 99-115, January.
    9. Thomson, William, 1983. "Equity in exchange economies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 217-244, April.
    10. Pazner, Elisha A., 1977. "Pitfalls in the theory of fairness," Journal of Economic Theory, Elsevier, vol. 14(2), pages 458-466, April.
    11. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
    12. Panzer, Elisha A & Schmeidler, David, 1974. "A Difficulty in the Concept of Fairness," Review of Economic Studies, Wiley Blackwell, vol. 41(3), pages 441-43, July.
    13. Mervyn A. King, 1980. "An Index of Inequality: With Applications to Horizontal Equity and Social Mobility," NBER Working Papers 0468, National Bureau of Economic Research, Inc.
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