Pareto optimality as a guide to income redistribution

Abstract

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.’