Pareto optimality as a guide to income redistribution

The concept of Pareto optimal redistribution schemes based on interdependent utilities and public goods theory is of little practical significance to real world redistribution issues. A number of studies suggest that charity should be handled as if it were a public good involving a consumption externality. A strict application of the theory of public goods, however, does not support the conventional rationale for governmental redistribution or the conclusion that the level of private charity is sub-optimal. First, a rigorous adherent of the Pareto criterion remains silent on policies which harm some people while benefitting others. Unanimous agreement concerning government redistribution is inapplicable whether the transfer decision is at the constitutional level or at the operating level of government. Second, transfers do not fit the public goods framework. In the case of voluntary transfers, the non-rivalness and non-exclusion features are not met. In the case of government redistribution, there is no compelling evidence that the alleged public goods externality associated with transfers is positive. And, even if there were a positive externality associated with transfers, it cannot be demonstrated analytically that the government handles externalities better than the market (Dahlman). The ‘optimal transfer’ analyses assume costless transfers based on an idealized polity. Any analysis of the optimal level of redistribution must consider problems of ‘government failure’ as well as those of ‘market failure.’ Pareto optimal redistribution is a ‘psychologically effective term’ but cannot logically be used as a justification for egalitarian measures (Yeager). When one considers problems arising through non-market failure it is clear both that the various hypotheses advanced to justify redistribution whether based on altruistic or non-altruistic motives, do not, in fact, justify redistributive activities, and that they cannot do so without a social welfare function that makes interpersonal utility comparisons. Furthermore, POR has negligible value in explaining or predicting decisions relating to current government transfers which are largely between groups not defined by income. In sum, Pareto optimality as a positive or normative theory of income redistribution is an ‘empty economic box.’ Copyright Martinus Nijhoff Publishers bv 1981