Chapter 3: Social Justice
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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