Explain how redistributing income creates a deadweight loss. ...

[acc299]

Explain how redistributing income creates a deadweight loss.
 
  What will be an ideal response?

Question 2

Why does an increase in the minimum wage increase the demand for union labor?
 
  What will be an ideal response?

[Alyson.hiatt@yahoo.com]

Answer to Question 1

When income is redistributed from a richer person to a poorer person, both parties are affected. The richer person, who loses income, will pay a higher tax on earned income. This higher tax decreases the opportunity cost of leisure time (time spent not working) so the person will take more leisure time and work less. For the poorer person who gains income, the income transferred (say, welfare payments) will be reduced when the person earns more income. As a result, the poorer person also has less incentive to work. Because both the richer person and the poorer person have less incentive to work when the government administers income redistribution, there is created a deadweight loss, that is, a decrease in efficiency to society.

Answer to Question 2

An increase in the minimum wage raises the cost of unskilled labor, which is typically nonunionized. By making this type of labor, which can be substituted for union labor, more expensive, an increase in the minimum wage increases the demand for union labor.

[acc299]

Excellent

[AngeliqueG]

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