Exercise 8.52
The government wishes to determine whether increasing the price of NFDEQ, for the benefit of a fall in the price of FDEQ, would be good for poverty.
  1. Assess this for a ratio of the MCPF of NFDEQ over that of FDEQ equal to 1, for a range of poverty lines and for all distribution-sensitive poverty indices (second-order, a=1 or s=2).
  2. Up to which ratio of MCPF can we go and still declare the reform to be good for poverty?
  3. Are these conclusions also valid for the goal of inequality reduction?
Answer

RECALL

 
STEP 1: Initialising  the sampling weight: EDIT|Set Sample Design

 

  • After choosing the appropriate variable(s), click on  the button OK.

 

STEP 2: Use the DAD Application: DOMINANCE|INDIRECT TAX DOMINANCE

  • After choosing the appropriate variable(s) and parameters, click on the GRAPH button.

RESULTS

  1. Since the distributive benefit d1,2 is higher than the economic cost g, the reform should be socially efficient.

  2. If we suppose that the range of poverty lines is between 0 and 200 000, the critical g is 1.09310196

  3. Yes : s=2.