Diminishing Utility and Society
Lerner applied the concept of utility and its associated "law of marginal utility" to the distribution of income in society. The law of diminishing marginal utility implies that poorer people will gain more utility from money for additional spending than the wealthy. For instance, if a homeless family is given a gift certificate for a house, they will be able to use it to provide shelter for themselves. If a very rich person is given such a gift, he may spend it on a vacation residence which he will only use a few weeks of the year.
As such, aggregated utility would be maximized by taking wealth from the rich and giving it to the poor, and the state of optimized utility would be perfect economic equality. As Lerner puts it, "If it is desired to maximize the total satisfaction of a society, the rational procedure is to divide income on an equalitarian basis" (Lerner, 32). In other words, if we are given a fixed amount of wealth and a group of people to distribute it to, we can maximize total happiness by dividing the wealth equally between the members of that group.
However, in real situations the total amount of wealth is not fixed, and it has been argued that too much redistribution of income can reduce this total amount by lowering incentives for economic growth and development. Knowing this, Lerner qualified his earlier statement: "The principle of equality would have to compromise with the principle of providing such incentives as would increase the total of income available to be divided” (Lerner, 36). In this view, a balance must be reached between equality and incentives.
Read more about this topic: Distributive Efficiency
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