Demand: Utility and Marginality

Introduction

Society must make a decision as to whether they would prefer a more efficient or a more equal society. Free market economies often encourage efficiency of production but in order to promote equality, stakeholders must resort to certain philosophies that would minimize occurrence of this possibility.

Political philosophies

The philosophy of utilitarianism is the most plausible in comparison to the other two. This philosophy puts forward the notion that society should pursue approaches that increase overall utility where utility denotes the maximum satisfaction that individuals in society enjoy. There are three basic factors that can be used as indicators of people’s opinions on the overall standard of living within any society i.e. collective happiness, poverty and income inequality. Many individuals feel very strongly about poverty and inequality; they claim these are concepts that should be eradicated from society as soon as possible. Additionally, collective happiness is an indicator of people’s satisfaction with their lives or how their society operates. A favorable philosophy would be one that eradicates poverty and inequality and also enhances collective happiness. The principle of utilitarianism would be able to achieve these very effectively. While this principle does not advocate for complete income uniformity – as this would substantially reduce the collective efficiency of production and hence overall efficiency – it still acknowledges the fact that there are substantial inequalities in society and that there is much that can be achieved in terms of curbing inequality. This philosophy makes sense when examined under the marginal utility lens i.e. that certain persons derive greater utility from making minor additions to their incomes than others and the government can therefore be justified in pursuing such a principle. (Cook, 1998)

What the three philosophies would say about Bill’s income

The principle of utilitarianism would assert that Bill’s excessive earnings are harming Sam’s ability to gain utility from his income. Consequently, a utilitarian would advocate for greater taxes on Bill than Sam in order to distribute income and hence maximize marginal utility. However, the taxes ought not to be so excessive as to discourage Sam from continuing to work hard and hence contribute less to society’s total income. Conversely, the Libertarian school of thought would argue that Sam and Bill should be left alone as long as Bill earned his income in a legal and economically sound manner. These theorists would merely make sure that Sam does not interfere with Bill’s efforts by stealing or doing something illegal. Libertarians believe that any other interferences or attempts at income distribution would merely lead to less production efficiency. Lastly, the principle of liberalism would advocate for the greatest form of government intervention i.e. through heavy income tax for Bill. This is because it postulates that the person with the least income needs to be protected the most in order to prevent possible entry of Bill into this group.

Tax system

Tax systems are assessed on their capacity to affect tax burden in relation to consumption and income. A society can have progressive, flat or regressive tax systems. The first tax system is characterized by an increment of tax rates depending on the nature of one’s income. The opposite of such a system is the regressive tax where tax rates reduce with increasing income. (Mc Cluskey, 2005)Flat tax rates do not change irrespective of people’s income. I would favor the progressive taxes because of the concept of marginal utility. A person in the low income bracket would be affected more by a thirty percent reduction in their income than a high income earner. (Walter, 2008) People in low income brackets are already struggling to meet their basic needs and excess taxation would substantially reduce their quality of life. On the other hand, a high income earner would not be as adversely affected by such a cut as he can already meet his basic needs.

Whether government should be involved in income distribution

The government should be involved in incomes because of two major reasons. The first is derived from the philosophy of utilitarianism. Not everyone in society benefits in the same manner from a slight increase in their income. If the poor can somehow be assisted by a slight income increase then this would go a long in making society more equal. In the end, even the wealthy would be more secure with their wealth because they would not have to worry about high crime rates or other problems caused by unequal distribution of resources. Secondly, the government should be involved in income redistribution because this protects every single member of society in the event that they become poor. The latter argument is supported by the liberal school of thought. These theorists often argue that one must aim at improving the status of the least privileged person in society because there is a possibility that one could fall in that position. When this arises without some government incentive to make the standard of living for the latter person better, then chances are that life would be almost intolerable for that individual. Government interventions therefore produce some form of insurance for people from all income groups in the event that they fall from their class to the lowest one. (Phillipe & Norberg, 1994)

Conclusion

It is always difficult to determine whether or not government interventions on incomes are necessary or not. Therefore in order to make such a decision one must choose a philosophical standpoint. In the Liberal school of thought, society should look out for the least privileged person and such a philosophy would therefore support government intervention through methods that support low income earners such as progressive taxes.

References

Cook, R. (1998). Role of government: redistribution of income. Center for policy excellence/ budget policy.

Mc Cluskey, W. (2005). Value taxation. NY: Ash gate publishers.

Phillipe, H. & Norberg, K. (1994). Liberty, fiscal crises and representative government. NY: Simon and Schuster Publisher.

Walter, W. (2008). Government theft – American style. WorldNet Daily.

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