Task 1

Suppose that two individuals, Jon and David, form a community and...
Suppose that two individuals, Jon and David, form a community and would like to construct a
communal fort that would protect them from attacks. They both consume good X, a private good,
and the protection of the fort, P. One unit of good X costs 1 unit of currency, and one unit
of P costs 2 units of currency. Both Jon and David have an income of 100 and a utility function
of the form:

U = log(Xi) + 2 × log(PJ + PD)

The budget constraint for each is given by:
Xi + 2 × Pi = 100

(a) Find the amount of protection Jon will provide as a function of how much David
provides, and explain why the relationship is the way it is.

Maximize: log(Xi)+2log(PJ+PD)

subject to: Xi+2Pi=100

Budget constraint: Xi=100-2Pi

We can substitute the above Xi into the utility function

log(100-2Pi)+2log(PJ+PD)

Differentiating with respect to PJ and equating it to zero yields the following equation:

(-2/(100-2PJ))+2/(PJ+PD)=0

Open up the brackets to get:

3PJ=100-PD (i)

Likewise, by differentiating with respect to PD and setting it equal to zero, similar to the
previous scenario, the resulting equation is as follows:

3PD=100-PJ (ii)
Upon applying the elimination method to solve the given pair of equations (i) and (ii), the
resulting solution is as follows:

PD=PJ=25

X1=X2=50

Both of them will offer equivalent levels of protection due to having identical budget functions.
Consequently, they will derive equal utility from their respective actions.

b) How much protection P will be privately provided in this case?

The private protection provided in this case if 25+25=50.

(c) Explain the economic intuition behind this amount, and compare it to the socially
optimal amount without solving for the socially optimal amount.
The socially desirable quantity will exceed 50 since public goods tend to be insufficiently
provided by the private market. Therefore, the optimal amount from a societal perspective will
be greater than 50.

Task 2

Recommended length: half a page to one page

Applied Portfolio Task 2: Interpretation of empirical evidence
Read Doyle and Samphantharak (2008). Briefly describe what the aim of the paper is. Now
consider Table 2 (Panel A) replicated below from Doyle and Samphantharak (2008).
Looking at the estimates in column (1), discuss briefly what the main coefficient of interest
(shown in bold) means, specifying what is the dependenr variable in that model and what
is the relevant explanatory variable of interest. What econometric model are the authors
using to obtain this estimate? Assuming that a full shifting of tax changes from producers
to consumers would lead to a 4.5% drop in gas prices following the gas tax repeal in
Illinois and Indiana, what does the coefficient of interest in column (1) imply about the
pass-through rate?
Doyle Jr, J., & Samphantharak, K. (2008) $2.00 Gas! Studying the effects of a gas tax
Moratorium. Journal of Public Economics, 92(3-4): pp. 869-844.
The aim of this paper is to identify the effect of gas tax repeal in Illinois and Indiana following a
price spike in 2000
The dependent variables in the analysis are the logarithm of the retail price and the logarithm of
the wholesale price. The independent variable is whether the location is Illinois or Indiana. The
post July 1 period is considered a control variable, and the interaction term is the product of
being in Illinois or Indiana and the post July 1 period.
The estimates in Table II are divided into three distinct time periods: right before and after July
1, October 29, and January 1. In column (1), the model without control variables reveals that
retail prices experienced a decrease of approximately 3.5% during the period surrounding the tax
change in July. When including the control variable in column (2), the estimated decrease in
retail prices decreases to 2.9%. In column (3), the estimates remain relatively unchanged.
However, in column (4), it is observed that retail prices fell by roughly 0.7% during the post-July
period, coinciding with the tax change when log wholesale price is the dependent variable.
The findings present a mixed picture regarding wholesale prices. The estimates indicate that
wholesale prices decreased in each of the periods, but these decreases were statistically
insignificant. Specifically, there was a 0.7% decline in Illinois/Indiana during the tax decrease
period, a 0.35% decrease during the tax increase in Indiana, and a 0.08% decrease during the tax
increase in Illinois. It is worth noting that these changes were relatively small, and including the
wholesale price variable did not significantly impact the main results of the analysis.
For a tax moratorium to reduce prices it is necessary to estimate the pass-through rate’the
proportion of the tax paid by consumers if the gas prices will drop by 4.5% then its 3.5% will
pass to consumers.
TASK 3

Applied Portfolio Task 3: Statistical/econometric analysis Write a report that examines the
relationship between income inequality and fiscal redistribution. Use fiscal data from
Applied Portfolio Task 3: Statistical/econometric analysis Write a report that examines the
relationship between income inequality and fiscal redistribution. Use fiscal data from
OECD.Stat (National Accounts>Annual National Accounts>General Government
Accounts>Govemment expenditure by function (COFOG)) and inequality estimates from
WIID (file: x_swiid9_22ip > swiid9_2_summary) to produce your own empirical evidence
in the form of summary statistics and graphs/charts. Discuss all your tables and graphs.
What information can you extract from them? Combine the two datasets to run regression
analysis in order to estimate the association between fiscal redistribution and income
inequality. Explain your estimation results.

In addition to presenting your own empirical evidence, discuss what previous economic
literature has found about the relationship between income inequality and fiscal
redistribution. Make sure to provide full citations, including authors' names; titles of
articles etc.

LU m expenditure by function (COFOG)) and inequality estimates from WIID (file:

x_swiid9_22ip > swiid9_2_summary) to produce your own empirical evidence in the form
of summary statistics and graphs/charts. Discuss all your tables and graphs. What
information can you extract from them? Combine the two datasets to run regression
analysis in order to estimate the association between fiscal redistribution and income
inequality. Explain your estimation results.

In addition to presenting your own empirical evidence, discuss what previous economic
literature has found about the relationship between income inequality and fiscal
redistribution. Make sure to provide full citations, including authors' names; titles of
articles etc.

Introduction

This study examines the redistributive impact of government expenditure accounts for United
kingdom. The secondary data of Government expenditure by function (COFOG)) and inequality
estimates from WIID is download from OECD.stas. The fiscal data is taken from 2010 to 2017
for analysis.

Literature.Review
The Wold Banks’ World Development Report (2017) emphasized the importance of public
policies that produce development outcomes like security, growth, and equity. Consequently, the
implementation of policies regarding government spending can significantly influence both
economic growth and income inequality. Many governments are currently involved in fiscal
consolidation, and there has been a growing focus on studying ways to minimize the negative
impact on income distribution when implementing fiscal adjustments (Woo and others 2013).
Through empirical evidence, (Kunawotor et al., 2022) has shown that fiscal redistribution,
achieved through income taxes and transfers, only has a limited effect in reducing the income
disparity between the wealthy and the impoverished. The research conducted by Persson and
Tabellini (1994) yielded inconclusive results regarding the hypothesis that inequality leads to
increased redistribution, and that such redistribution subsequently hampers economic growth.
Turning our attention to more recent studies, Bleaney et al. (2001), reported that government
consumption expenditure and spending on social welfare do not affect the rate of growth,
whereas public investment has positive effects. Recent studies have reported similar findings,
indicating that taxes have a positive impact on economic growth Padovano and Galli (2002a,
2002b; Bergh and Öhrn (2011). In view of above literature this study seeks to investigate impact
of fiscal redistribution on income inequality.

Results & Discussions

The findings can be summarized as follows. Overall, there is evidence that from 2010 till 2013
the average inequality for the United Kingdom (measured by the average of the Gini
coefficients) declined very slightly. There also appears evidence of convergence: initially higher
(lower) levels of inequality more frequently experienced a decline (increase). Later on, it is
noticeable that income inquality then started to raise from 2013 till 2014 and now it is stable
from 2016 to onward
32 31.5
Gini Coefficient
31 30.5

2010 2012 2014 2016 2018

Year

The bar chart below shows that final consumptions and social benefits transfers in kind are
continuously being increasing from 2010 to 2010
 380000

320000
370000

Social_benefits__transfers_in_kind
Final_consumption_expenditure

300000
360000

280000
350000 340000

260000
2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Year Year

The bar chart below shows that United Kingdom Government decisions of spending on property
and income never remained constant from 2010 till 2017. Whereas, government expenditures on
other current transfers were highest in 2010 and lowest in 2018, continuously delining.
55000

45000
Property Income
50000

Other current transfers

40000
45000

35000

2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Year Year

The graph below shows fluctuations of government spending’s on other current transfers, it
declined from 2010 to 2012, started to rise and reached on peak in 2013. Later on, again started
to decline till 2018. Whereas, the redistribution of fiscal budget on social benefits is rapidly
rising from 2010 till onwards. Further, the graph below shows that spending’s on final
consumption expenditures always remained higher than social benefits in kind.
 45000

320000
Social_benefits__transfers_in_kind
Other current transfers

300000
40000

280000 260000
35000

2010 2012 2014 2016 2018 2010 2012 2014 2016 2018
Year Year
400000
350000
300000
250000

2010 2012 2014 2016 2018

Year

Final_consumption_expenditure Social_benefits__transfers_in_kind

Descriptive Statistics

Table below presents the Gini coefficient for market income and the other three income concepts
shown in Table: disposable, total government expenditures, final consumption expenditure In
broad terms, final consumption expenditure measures how much individuals are able to actually
consume. Property income Intermediate cost includes the taxes on production as well as taxes on
consumption to pay tax for services to the government. Others includes other current transfers,
and social benefits in kind. The descriptive statistics below shows that maximum total
government spending’s are 8,365, 73 billion GBP and minimum of 7,550,10 billion GBP.
Further, it is noticeable from the table that government spending’s of highest proportion is on
final consumptions and lowest on gross capital
. summarize

Variable Obs Mean Std. Dev. Min Max

Year 8 2013.5 2.44949 2010 2017

TotalGover~e 8 788022.5 28791.19 755010 836573
Final_cons~e 8 353267.6 13442.83 337275 372789
PropertyIn~e 8 48953.38 3575.252 43886 55414
Social_ben~i 8 293813.5 17350.13 266550 314625

Intermedia~o 8 155880.9 6515.209 146819 162193

Othercurre~s 8 40552.13 3346.522 35572 45187
Grosscapit~q 8 47660.63 2580.739 43853 51455
GiniCoeffi~t 8 31.2875 .3720119 30.7 32

Correlation

The Pearson correlation shows that relation between gini-coefficient and other variables is
negative except other current account transfers and gross capital which is positive but weak
association.

TotalG~e Final_~e Proper~e Social~i Interm~o Otherc~s Grossc~q GiniCo~t

TotalGover~e 1.0000
Final_cons~e 0.9898 1.0000
PropertyIn~e 0.3453 0.2593 1.0000
Social_ben~i 0.9542 0.9724 0.2237 1.0000
Intermedia~o 0.8392 0.8865 0.0362 0.8892 1.0000
Othercurre~s -0.9317 -0.9410 -0.3296 -0.9097 -0.7535 1.0000
Grosscapit~q 0.5657 0.5625 0.1651 0.3663 0.4478 -0.5988 1.0000
GiniCoeffi~t -0.2622 -0.2655 -0.2390 -0.4548 -0.3927 0.1534 0.5708 1.0000

Linear Regression

The analysis of linear regression shows that there is not significant impact of Govenment
expenditure by function (COFOG on ginni coefficient of income inequality. The f-test score is
17.2 and its p-value is 0.1825 which is greater than alpha of 0.05 which shows that model is not
statistically significant in income inequality.
> ertyIncome Final_consumption_expenditure

Source SS df MS Number of obs = 8

F( 6, 1) = 17.20
Model .959452838 6 .159908806 Prob > F = 0.1825
Residual .009297162 1 .009297162 R-squared = 0.9904
Adj R-squared = 0.9328
Total .96875 7 .138392857 Root MSE = .09642

GiniCoefficient Coef. Std. Err. t P>|t| [95% Conf. Interval]

Grosscapitalformationandacq .0001049 .0000996 1.05 0.484 -.0011605 .0013702

Othercurrenttransfers -.0000139 .0000729 -0.19 0.880 -.0009407 .0009129
IntermediateconsOthertaxeso -.0000423 .0000237 -1.79 0.324 -.000343 .0002584
Social_benefits__transfers_in_ki -.0000218 .0000526 -0.42 0.749 -.0006901 .0006464
PropertyIncome -.000041 .0000127 -3.24 0.191 -.0002019 .0001199
Final_consumption_expenditure .0000265 .0000562 0.47 0.720 -.0006882 .0007412
_cons 32.51914 4.940207 6.58 0.096 -30.25214 95.29042

Conclusion: The analysis shows that income inequality cannot be determined from Govenment
expenditure by function (COFOG).

References

Aissaoui, N. (2017) ‘Is inequality harmful for broadband diffusion and economic growth?’,
Asian Economic and Financial Review, 7(8), pp. 799–808.
doi:10.18488/journal.aefr.2017.78.799.808.

Bergh, A. and Öhrn, N. (2011) ‘Growth effects of fiscal policies: A critical appraisal of
colombier’s (2009) study’, SSRN Electronic Journal [Preprint]. doi:10.2139/ssrn.2111152.

Bleaney, M., Gemmell, N. and Kneller, R. (2001) ‘Testing the endogenous growth model: Public
expenditure, taxation, and growth over the Long Run’, Canadian Journal of
Economics/Revue canadienne d’économique, 34(1), pp. 36–57. doi:10.1111/0008-
4085.00061.

Galor, O. and Moav, O. (2000) ‘From physical to human capital accumulation: Inequality in the
process of development’, SSRN Electronic Journal [Preprint]. doi:10.2139/ssrn.249868.

Kunawotor, M.E. et al. (2022) ‘The distributional effects of fiscal and monetary policies in
Africa’, Journal of Social and Economic Development, 24(1), pp. 127–146.
doi:10.1007/s40847-021-00172-y.

Padovano, F. and Galli, E. (2007) ‘Tax rates and economic growth in the OECD countries’,
Economic Inquiry, 39(1), pp. 44–57. doi:10.1111/j.1465-7295.2001.tb00049.x.

World Bank. 2017. World Development Indicators. Washington, DC: World Bank.