Microeconomics Solutions 13

Chapter 13
Government and the

Individual
Exercise 13.1 A local public good is one that is specic to a particular mu-
nicipality: within the municipality good 1 is provided as a public good, but the
consumer has to be resident there to benet from good 1. Residence in a mu-
nicipality also determines liability to provide for the public good. Residents can
choose which municipality to live in. Suppose that exactly one unit of private
good 2 is required to produce one unit of the local public good 1 and that, in
a given municipality of people, total output is determined by a production
function
= c() .
where c is a strictly concave function. Each individual in a municipality gets
utility l (r
1
, r
2
) where r
1
is the amount of the local public good, r
2
is the
individuals consumption of the private good and l is a utility function with the
usual properties.
1. What are the transformation curve and the production-possibility set for a
single municipality of size ?
2. If the residents of the municipality could choose both the proportion of total
output devoted to the local public good and the size of the municipality,
explain how these would be determined. Show that if individuals are paid
their marginal product then the amount required to nance the public good
is exactly the dierence between the wage bill and the total output.
3. If the size of a municipality can take any value between 1 and in-
clusive, where is the total population in the economy, use your answer
to part 1 to explain what the production possibility set is when is al-
lowed to vary. Hence show that the optimal size of municipality could be
multivalued.
4. Assuming that there is an interior solution to the optimal value of sketch
the relationship between utility and size of municipality.
5. In an economy there are two municipalities with identical production con-
ditions. Individuals can migrate costlessly from one community to another
263
Microeconomics CHAPTER 13. GOVERNMENT AND THE INDIVIDUAL
if they would achieve higher utility by doing so. Using the diagram from
part 4 show that this migration mechanism may lead to multiple equilibria,
some of which will be unstable.
6. Show that the stable equilibria in part 5 may be inecient.
Outline Answer.
1. For a given size the maximum amount of (locally public) good 1 that
could be available if all resources were used to produce it is c(); the cor-
responding maximum amount per person of the private good is c() ,.
So production possibilities are given by the shaded area in Figure 13.1.
(N)/N
(N)
x
2
x
1
Figure 13.1: Production possibilities in municipality of given size
2. In this case the problem is eectively just a version of the club model.
The simple materials balance condition in this economy is given by
c()
. .
total output
= r
1
..
amount of local public good
+ r
2
..
total amount of private good
so that the amount of private good per person is
r
2
=
1
c()
r
1
Given the standard utility function in the question the individual seeks to
maximise
l
_
r
1
,
1
c()
r
1
_
(13.1)
c _Frank Cowell 2006 264
Microeconomics
The FOCs for a maximum give
l
2
_
r
1
,
1
c()
r
1
_
+ l
1
_
r
1
,
1
c()
r
1
_
= 0 (13.2)
_
c
N
()

c()
2

r
1
2
_
l
2
_
r
1
,
1
c()
r
1
_
= 0 (13.3)
which implies
1 =
l
1
(r
1
, r)
l
2
(r
1
, r)
(13.4)
and
r
1
= c() c
N
() (13.5)
If workers are paid their marginal products then the total wage-bill is
c
N
(). So the amount required to nance the public good is exactly
the dierence between the wage bill and the total product.
3. Consider the extension of the production possibilities in Figure 13.1. to a
case where there are three possible sizes of community: this is depicted as
the intersection of the triangular shapes in the left-hand panel of Figure
13.2. By extension the general case is as in the right-hand panel of Figure
13.2. Given the non-convexity of the attainable set it is clear that for some
types of indierence curve one could have multiple solutions at (0, c(1))
and
_
c
_
_
, 0
_
.
x
2
x
1
x
2
x
1
x
2
x
1
(b) (a)
Figure 13.2: Production possibilities for (a) three values of (b) many values
of
4. If there is a well-dened interior solution then the optimum must look like
that depicted in Figure 13.3. Clearly this implies that utility at the point
(0, c(1)), where = 1, and at
_
c
_
_
, 0
_
, where = , is less than
at the optimum. So maximised utility for a representative individual as
a function of the size of the municipality () must look like one of the
two cases in Figure 13.4.
5. Given that there are two municipalities we may plot the maximised utility
for each on the same diagram as () and
_

_
see Figure 13.5
x
2
x
1
Figure 13.3: Optimal size of municipality
N
(N)
N
N
(N)
N
Figure 13.4: Utility and size of municipality
Microeconomics
N
(N) (N N )
U
t
i
l
i
t
y

i
n

f
i
r
s
t

m
u
n
i
c
i
p
a
l
i
t
y
U
t
i
l
i
t
y

i
n

s
e
c
o
n
d

m
u
n
i
c
i
p
a
l
i
t
y
?
N
Figure 13.5: Equilibrium with migration

where () is assumed to have the form illustrated on the left-hand side
of Figure 13.4. Now consider the migration mechanism: individuals will
move to the municipality where there is the higher utility. Now, on the
left-hand side of Figure 13.5 we have
_

_
()
so that must be falling (migration leads to an increase in the size of
the second municipality ) the migration mechanism continues until
= 0. On the right-hand side of the gure
()
_

_
and so the reverse happens is rising and carries on rising until = .
In this case, therefore, it is clear that there are three equilibrium values
of , namely 0,
1
2
and where the cases = 0 and = are locally
stable and the case =
1
2
is unstable. On the other hand if () is
assumed to have the form illustrated on the right-hand side of Figure 13.4
then the migration diagram becomes as in Figure 13.6; clearly there is a
single stable equilibrium where both municipalities have size
1
2
.
6. From Figure 13.5 it is clear that
_
1
2
_
(0) =
_
_
, establishing the
point that the locally stable equilibria at = 0 and = are inecient.
. .
Figure 13.6: Equilibrium with migration 2
Microeconomics
Exercise 13.2 (A continuation of Exercise 4.13) There is a single rm pro-
ducing good 1 with costs xed cost
C
0
+ c (13.6)
where the constant marginal cost c is assumed to be large as in Exercise 4.13;
all consumers are identical with preferences given by
l(r
1
, r
2
) = cr
1
2
1
+ r
2
(13.7)
as in Exercise 4.12. The government allows the rm to charge what price it likes
but oers to pay the rm a subsidy equal to the consumers surplus generated by
the price that it charges.
1. Is the regulation mechanism ecient?
2. Does the government as regulator need to know (a) the cost function? (b)
the utility function?
3. Show that this mechanism allows the rm to exploit consumers completely
.
Outline Answer
1. Given (13.6) the rms prots can be written
= j C
0
c + 1 (13.8)
where j is the price that the monopoly charges for good 1 and 1 is the
subsidy. Given (13.7) the consumer seeks to maximise
cr
1
2
1
+ [j jr
1
]
where j is the consumers income and the price of good 2 has been nor-
malised at 1. The FOC for an interior maximum is
1
2
cr
1
2
1
j = 0 (13.9)
from which we obtain the consumers demand for good 1 as
r
1
=
c
2
4j
2
(13.10)
(the condition on the cost function in Exercise 4.12 will ensure that the
corner solution, where the person spends everything on good 1, is irrele-
vant), From (13.9) the inverse demand function is
j (r
1
) =
1
2
cr
1
2
1
So the consumers surplus is
CS =
_
x
1
0
j (t) dt j (r
1
) r
1
=
_
x
1
0
1
2
ct
1
2
dt
1
2
cr
1
2
1
= cr
1
2
1

1
2
cr
1
2
1
=
1
2
cr
1
2
1
=
c
2
4j
(13.11)
From (13.8) rms prots can be written
[j c] C
0
+ 1.
If the size of the market is standardised at 1 for convenience (there is a
very large number of small consumers with total mass 1) then = r
1
and so, setting 1 = CV and substituting from (13.10) and (13.11), the
expression for prots becomes
[j c]
c
2
4j
2
C
0
+
c
2
4j
Simplifying this, the rms problem can be represented as choosing j to
maximise
=
c
2
2j
c
c
2
4j
2
C
0
. (13.12)
The FOC is
c
2
2j
2
+ c
c
2
2j
3
= 0
which on simplifying yields j = c. In other words we have price equal
to marginal cost, the necessary condition for an ecient outcome. This
outcome will be chosen by the rm if prots are non-negative. Under the
above conditions (13.12) shows that this requires
c
2
2j
j
c
2
4j
2
C
0
_ 0; (13.13)
in other words
CS _ C
0
(13.14)
But this is exactly the condition under which it is ecient to produce
good 1 rather than not produce the good.
2. The only information required is the ordinary demand function (13.10).
3. Suppose the monopolist were empowered to charge an entrance fee 1 for
the right to buy commodity 1. Prots would be
= j C
0
c + 1 (13.15)
Microeconomics
and the consumers budget constraint (if he chooses to buy good 1) would
be
jr
1
+ r
2
1 _ j (13.16)
Given that the persons utility if he does not consume good 1 (he spends
all of his income on good 2) is simply j then the rm knows that the
consumers participation constraint is
cr
1
2
1
+ r
2
_ j (13.17)
Combining (13.16) and (13.17) we have the constraint
cr
1
2
1
jr
1
1 _ 0 (13.18)
Clearly, for any j, the prot-maximising rm will increase 1 to ensure
that (13.18) is satised with equality. The consumers demand for good 1
is given by (13.10) and so (13.18) becomes
1 = c
c
2j
r j
c
2
4j
2
(13.19)
in other words
1 = CS.
Hence the scheme whereby the rm is subsidised by the amount of the
consumers surplus (and this subsidy is raised from the consumers as a
lump-sum tax) is equivalent to the scheme where the rm is allowed to
charge an entry fee. The consumer is forced back on to reservation utility
level where (13.16) and (13.18) are binding.
Exercise 13.3 The government of the tiny island of Mugg is considering whether
it would be a good idea to install piped gas. Once the gas distribution system
is installed each unit of gas (commodity 1) costs a xed amount : of other
goods (commodity 2); there is additionally a xed cost 1 incurred in setting up
a distribution system on the island. Before the system is installed Mugg enjoys
a total amount 1
2
of commodity 2. The residents of Mugg are assumed to be
identical in every respect and their tastes are represented by the utility function
c
_
1 c
x
1
+ r
2
where (r
1
, r
2
) represent the quantities consumed of the two goods and c is a
non-negative parameter.
1. What is the maximum number of units of gas that could be aorded on
Mugg?
2. Draw the production-possibility set; draw the indierence curves in two
cases: where c is large and where c is small.
3. Use the diagram to show that whether it is a Pareto improvement to install
the gas system depends on the value of c.
4. If the installation of gas on Mugg is Pareto-improving, describe the Pareto-
ecient allocation of goods and suggest a scheme by which the publicly-
owned corporation MuggGas could implement this allocation if it knows
the willingness to pay of the residents.
Outline Answer
1. Because setting up the gas supply costs 1 and each unit costs :, the
supply of r
1
units will cost 1 + :r
1
units of commodity 2. Given that
the total amount of commodity 2 available is 1
2
, the maximum supply of
gas is
r
1
=
1
2
1
:
2. In Figure 13.7 the feasible set is represented by the solid triangle with the
spike on top: the height of the spike is 1 and the slope of the boundary
is :. The MRS for the specied family of preferences is given by
dr
2
dr
1
=const
= cc
x
1
.
which means that they are vertically displaced in (r
1
, r
2
)-space, they
get steeper as the parameter c increases and they can touch the r
2
-axis .
Clearly c picks up the strength of the willingness-to-pay for gas.
3. If c < :c
x
1
then there can be no solution on the r
1
-axis. There remain
two dierent types of solution, depending on the values of c:
The high-valuation tastes (high-c indierence curves) have steep in-
tercepts on the vertical axis: clearly the optimum in this case would
be as in Figure 13.8.
Microeconomics
x
1
x
2
R
2
F
m
[R
2
F]/m
Figure 13.7: Gas: production possibilities
The low-valuation tastes are given by the at indierence curves and
the optimum is as in Figure 13.9 no gas should be supplied and
everyone consumes (0, 1
2
). The no-gas utility level is obviously just
1
2
.
Clearly it is Pareto-optimal to provide gas if c satises
c ::log
_
c
:
_
1.
4. If the installation is undertaken, the maximum utility that can then be
obtained is at the point where the indierence curve touches the produc-
tion possibility set. Since the slope of the production possibility frontier
is : this means that
r
1
= log
_
c
:
_
,
r
2
= 1
2
1 :log
_
c
:
_
.
At (r
1
, r
2
) utility is
c : + 1
2
1 :log
_
c
:
_
.
Evidently this yields greater utility than the no-installation case. The gas-
supply corporation can induce the (r
1
, r
2
) outcome by making consumers
pay 1 as a xed charge and then a (marginal) price of : per unit of gas.
x
1
x
2
R
2
Figure 13.8: High valuation: optimum production is positive
x
1
x
2
R
2
Figure 13.9: Low valuation: optimum production is zero
Microeconomics
Exercise 13.4 Take the model of the Island of Mugg (Exercise 13.3) again.
Suppose that the government of Mugg has a horror of public enterprise and de-
cides to delegate the decision on installation and supply by selling o MuggGas.
1. Will this generate an improvement on the no-gas situation?
2. Will it generate an ecient allocation?
3. How would your answers be aected if MuggGas were split into a number
of private companies, or if consumers were allowed to resell gas to each
other?
Outline Answer
1. The answer depends on whether the rm is allowed to make a xed charge
to cover the xed cost. If the rm is restricted to charging a uniform price
to all customers then privatisation here could be a disaster. There are two
possibilities:
x
1
x
2
R
2
Figure 13.10: Gas: simple prot maximisation
If the rm (or rms) were to set price equal to marginal cost at the
ecient outcome it would make a loss.
If there were a monopoly with a uniform price for all units of gas
and no xed charge then the result is still bound to be inecient.
First note that given gas-price j a Mugg consumer will choose r
1
to
maximise
c
_
1 c
x
1
+ [1
2
jr
1
]
The rst-order condition for an interior maximum is
cc
x
1
j = 0
which implies
r
1
(j) = log
_
c
j
_
as the consumers demand for commodity 1, given the (uniform) price
j. Second, note that maximum prots for the rm are found by
choosing j to maximise
(j) := jr
1
1 :r
1
.
This becomes
(j) = jr
1
(j) 1 :r
1
(j)
= [j :] log
_
c
j
_
1 (13.20)
First-order conditions for an interior maximum are
0(j)
0j
= log
_
c
j
_
j :
j
= 0 (13.21)
This implies that prots at the optimum are given by
(j) =
[j :]
2
j
1
This may imply a Pareto-improvement over the no-gas case: the
consumer will be better o than at B if:
c
_
1 c
x
1
(p)
_
jr
1
(j) 0.
in other words:
c j j log
_
c
j
_
0
which implies
=log
_
c
j
_
<
c
j
1 (13.22)
This is satised if j < c. However the consumer cannot be better o
than at A. For this to happen we would need :
c j j log
_
c
j
_
c :1 :log
_
c
:
_
which implies
:
_
1
j
:
+ log
_
j
:
__
[j :] log
_
c
j
_
1 (13.23)
Given that j :, the left-hand side of (13.23) must be negative
Cf (13.22); but the expression for prots (13.20) implies that the
right-hand side of (13.23) must be nonnegative a contradiction.
Microeconomics
2. If the rm were sold of as a simple monopoly then clearly the solution
would not be ecient. If it were a regulated monopoly (as in Exercise
13.3) or could make a xed charge then it is possible to achieve an ecient
outcome.
3. Assume that the residents of Mugg are all high-valuation consumers.
Given that they can resell gas to each other (and if it is possible to do so
at low cost) there is no possibility of one of the privatised MuggGas rms
imposing a xed charge upon them. If gas is supplied the price would be
driven down to the marginal cost :, but the prot-maximising solution
will not be at point A but at B. No gas will be supplied, even though this
is a Pareto-inferior outcome to A (see the broken line in Figure 13.10).
Exercise 13.5 In an economy there are two rms each producing a single out-
put from a single non-produced resource according to
1
=
_
.
2
= max
_
_
1 . c
1
, 0
_
where
i
is the amount produced of good i, . is the amount of the resource used
in the production of good 1, 1 is the total stock of the resource and c is a
parameter.
1. What phenomenon does this model represent?
2. Draw the production-possibility set.
3. Assuming that all consumers are identical, sketch a set of indierence
curves for which (a) an ecient allocation may be supported by a pseudo
market in externalities; (b) a pseudo market is not possible.
4. What role does the parameter c play in the answer to the previous parts?
Outline Answer
1. There is a simple production externality: production of good 1 reduces
the amount of good 2 that can be produced for a given amount of input
devoted to the production of good 2.
Figure 13.11: Externality: two cases
2. Note that production of good 2 is positive if . < .
0
where
.
0
:=
1
1 + c
2
(13.24)
Microeconomics
The production-possibility set is as illustrated in the two panels of Figure
13.11.Note that the line segment 1 from
_
_
.
0
, 0
_
to
_
_
1, 0
_
belongs to
the set. The set is non-convex.
3. In panel (a) the solution is at the point of tangency and can be decen-
tralised using prices shown by the broken line. However in panel (b) this
decentralisation is not possible. If the prices given by the broken line are
used then production takes place, not at the point of tangency, but at
point
_
_
1, 0
_
.
4. From equation (13.24) shows that as c gets larger so too does the line 1
and the problem raised by the non-convexity becomes more salient.
Exercise 13.6 In a large economy all agents have a utility function of the form
c (r
1
) + r
h
2
where r
1
is the amount provided of a public good and r
h
2
is agent /s consumption
of a private good. All agents are endowed with the same amount of private good
1
h
2
= 1. Each individual can choose whether to contribute to the public good:
.
h
2
=
_
1 contribute
0 not contribute
The unit contribution costs an amount c
h
to agent /; the individual costs are
unobservable but the distribution function 1() of costs is known. The production
of the public good is given by
r
1
= c(c)
where c is the proportion of contributing individuals.
1. Show that an ecient outcome implies that there is cost level c
0
such that
.
h
2
=
_
1 c
h
_ c
0
0 c
h
c
0
2. The government introduces a tax-subsidy scheme based on individual ac-
tions as follows. Each contributor receives a subsidy : and each non-
contributor has to pay t. Given c
0
and the distribution of costs 1 what is
the condition for a balanced budget if agents behave as in part 1?
3. Under the conditions of part 2 what is the utility of someone with c
h
< c
0
?
Of someone with c
h
c
0
?
4. By requiring that someone with c
h
= c
0
be indierent between contribut-
ing and non-contributing show that this tax-subsidy scheme induces an
ecient equilibrium.
5. How much of the public good is provided and what is the tax rate and
subsidy rate?
Outline Answer
1. Pick a given level of provision of the public good r
1
. This then determines
a given number c representing the proportion of the population that must
contribute. Consider the situation where there is some c
0
such that .
h
2
= 0
if and only if c
h
c
0
. Under this scheme
c = 1
_
c
0
_
r
1
= c(1
_
c
0
_
).
Take a high-cost type individual that does not contribute (c
h
c
0
) and
a low-cost type individual who does contribute (c
`
< c
0
). Now change the
situation described above so that / contributes and / does not. The utility
loss to / is c
h
which is strictly greater than the utility gain c
`
to individual
/. Clearly no such perturbation can lead to a Pareto improvement.
Microeconomics
2. Under the above scheme there is a proportion 1
_
c
0
_
who are contributing,
so that the total subsidy required is given by :1
_
c
0
_
. Given that there
is a proportion 1 1
_
c
0
_
who are not contributing, the tax raised is
t
_
1 1
_
c
0
_
. So the budget constraint is
:1
_
c
0
_
= t
_
1 1
_
c
0
_
(13.25)
3. Consider someone with exactly cost c
0
. This person is indierent between
contributing and not contributing if
c (r
1
) + 1 c
0
+ :
. .
utility if contribute
= c (r
1
) + 1 t
. .
utility if dont contribute
(13.26)
where r
1
= 1(c
0
). Clearly if (13.26) holds then
c (r
1
) + 1 c
`
+ : c (r
1
) + 1 t
for c
`
< c
0
, and
c (r
1
) + 1 c
h
+ : < c (r
1
) + 1 t
for c
h
c
0
. It is also clear that c
0
is publicly available information
given that 1 is known. So this scheme is indeed an equilibrium and is
implementable
4. Condition (13.26) implies
: + t = c
0
(13.27)
Combining the budget constraint (13.25) with (13.27) we get
_
c
0
t
1
_
c
0
_
= t
_
1 1
_
c
0
_
and so the required tax rate is
t = c
0
1(c
0
), (13.28)
the subsidy rate is
: = c
0
_
1 1(c
0
)
, (13.29)
and the amount of public good provided is c
_
1
_
c
0
__
. It remains to
determine c
0
. This follows from the standard rst-order condition

MRS
=MRT. In the present case this gives
1
_
c
0
_
c
1
_
c
_
1
_
c
0
___
= c
1
_
1
_
c
0
__
(13.30)
where c
1
and c
1
denote the rst derivatives of c and c respectively.
Given particular functional forms for 1, c and c the value of c
0
can be
determined from (13.30).
Exercise 13.7 An economy consists of individuals whose income is only from
labour: each person is endowed with a specic level of ability which is reected
in his or her market wage n, and chooses /, the amount of time he or she
works 0 _ / _ 1. The minimum value of n in the population is n
0
, and
the mean value is n
0
, where 1. The government imposes a tax-transfer
scheme such that a person with pretax cash income j has after-tax cash income
of r = [1 t][j j
0
] + j
0
.
1. Interpret the parameters t and j
0
.
2. Assume that every individuals preferences can be represented by the utility
function r
[1 /]
1
. What is optimal labour supply as a function of n,
t and j
0
?
3. If the government wants to ensure that everyone works what constraint will
this impose on the values of t and j
0
? Assuming that everyone does work,
and that the tax raised is used solely for the purposes of redistribution,
show that this implies that t and j
0
must satisfy the constraint:
j
0
= cn
0
1 t
1 ct
4. If the government seeks to maximise the after-tax cash income of the poor-
est person (the welfare function with c = in Exercise 9.5) subject to the
above constraints show that the optimal tax rate is
t
=
1
c
_
1
_
c
1
_
Interpret this result.
Outline Answer
1. The operation of the tax and transfer system is illustrated in Figure 13.12:
t is the marginal tax rate, j
0
is the break-even income and tj
0
gives a
minimum guaranteed income.
2. The consumers problem is exactly the same as that of Exercise 5.7 with
the eective wage rate [1 t] n and nonwage income tj
0
. So we can just
adapt the result from there to get
/
=
_
c [1 c]
t
1t
y
0
w
, if n _ n
1
0 , otherwise
_
. (13.31)
where
n
1
:= j
0
t
1 t
1 c
c
(13.32)
is the reservation wage. Equation (13.31) gives labour supply as a func-
tion of n, t and j
0
.
Microeconomics
d
i
s
p
o
s
a
b
l
e

i
n
c
o
m
e
x
y
0
1
y
0
pre-tax income
y
Figure 13.12: The tax-transfer system and disposable income
3. To ensure that everyone works the government must set the tax parame-
ters so that n
0
n
1
in (13.31). From (13.32) this requires j
0
< j
1
:=
1t
t

1
n
0
. Net revenue raised in this system is given by
_
t[n/ j
0
]d1(n) (13.33)
and if the tax is purely redistributive, then (13.33) should be zero. If
everyone works then (13.31) and (13.33) imply
_
t
_
nc [1 c]
t
1 t
j
0
j
0
_
d1(n) = 0 (13.34)
Simplifying we get
_
ncd1(n) =
_
1 ct
1 t
j
0
d1(n) (13.35)
Using the denition of the mean of the unknown distribution 1 we get
immediately
j
0
= cn
0
1 t
1 ct
. (13.36)
Choosing the tax rate t then automatically xes the guaranteed income
(tj
0
) that can be aorded.
4. The after-tax cash income of the poorest person is given by [1t]n
0
/+tj
0
which, if the person works, becomes c[1t]n
0
+ctj
0
using the expression
for /
in (13.31); in view of the net-revenue constraint (13.36) this in turn

becomes
c[1 t]n
0
+ c
2
t
1 t
1 ct
n
0
. (13.37)
Expression (13.37) then becomes the objective function for a government
with Rawls type objectives. To nd the optimum we dierentiate (13.37)
with respect to t so as to get
cn
0
+ c
2
1 2t
1 ct
n
0
+ c
3
t
1 t
[1 ct]
2
n
0
= 0 (13.38)
which implies
1 = c
1 2t
1 ct
+ c
2
t
1 t
[1 ct]
2
. (13.39)
Simplifying this rst-order condition yields a quadratic in t:
c
2
[ 1] t
2
2tc[ 1] + c 1 = 0. (13.40)
Applying the standard solution algorithm we get:
t
=
c[ 1]
_
c
2
[ 1]
2
+ c
2
[ 1] [1 c]
c
2
[ 1]
(13.41)
If we rearrange (13.41) and ignore the irrelevant root we get the result.
Note that the optimal tax rate increases with : the larger is the mean
wage (relative to the lowest wage) the more well-o people there are to
pay for transfers.

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Microeconomics Solutions 13

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Chapter 13

Government and the

Figure 13.5: Equilibrium with migration

in (13.31); in view of the net-revenue constraint (13.36) this in turn

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