The Economics of Social Protection
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The Economics of Social Protection

Lars Söderström

This book focuses on arrangements for redistributing consumption opportunities over the life cycle and for providing compensation for income losses or large expenditures due to reasons such as illness and unemployment. After extensive coverage of the nature of inequalities in income and wealth in a market economy, and various notions of social justice, the author discusses public and private transfers in cash or in kind related to old age, childhood, illness and the like. Importantly, the book takes into account both equity and efficiency aspects.
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Chapter 3: Social Justice

Lars Söderström


The preceding analysis showed the nature of inequality in a market economy. We identified a number of factors explaining why people receive different amounts of income (or wealth, or consumption) during a particular period of time. Our presentation of these factors began with the case of identical individuals living in a world of homogeneous assets and jobs. In this case inequality was a result of random events and differences in age, but its size was modified by the rate of economic growth and private transfers. Next, we considered the case of non-identical individuals of the same age living in a world of homogeneous assets and jobs, with inequality generated by differences in initial position, preferences and random events. Initial positions are characterized by inherited ability and inherited material wealth. Finally, we relaxed the assumption of homogeneous assets and jobs and considered inequality related to differences in portfolios and occupations chosen by different individuals. Here, we made a distinction between compensating and non-compensating differences in the expected rate of return from various assets and in the expected rate of earnings in various jobs. With respect to non-compensating differences we divided rents into monopoly rents, entrepreneurial rents and hiring-and-firing rents. We shall now take a look at the relationship between inequality and social justice. There are many notions of social justice in the literature, but we only cover a few of them here. We start with the notion proposed by Duncan K....

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