In the above figure, if this natural monopoly is not regulated ...

[lak]

In the above figure, if this natural monopoly is not regulated the deadweight loss to society is
 
  A) ecf.
  B) ebc.
  C) gac.
  D) gde.

Question 2

A government redistribution of income program is proposed with the aim of making the income distribution the same as the 45 line in a Lorenz curve diagram. What implications does the idea of the big tradeoff have for the program?
 
  What will be an ideal response?

[Qarqy]

Answer to Question 1

C

Answer to Question 2

If the distribution of income was the same as the 45 line in a Lorenz curve diagram, then there would be no income differences across all households; everyone would have the same income. While this proposition might be appealing on an emotional level, the big tradeoff points out a significant drawback with this program and this outcome. The problem with the program arises because to achieve the desired result, the government would need to remove income from people who otherwise would be in the upper end of the income distribution and give the income to people who otherwise would be near the bottom end of the income distribution. This redistribution would drastically reduce the incentives of successful people to create new products, technologies and jobs. It would tell people that education, skill and training, and hard work will not be rewarded. People would rationally assume that there is no relationship between effort and outcome and therefore work effort would decrease sharply.