Problem
Suppose that the government were to find a new proiect at a cost of $600million and that the benefits of this project (which also equal $600m) were distributed uniformly among 100,000 citizens. The proiect will be funded from a proportionate tax.
You are also provided with the following information about the distribution of earnings:
• Median income = $800
• Average income = $1000
A. Derive the amount that someone on median income would pay towards this project and compare to the benefits they would receive. Would this policy be one that they would choose? Show your calculations for this and provide intuition for the
B. Would an individual with earnings > the average be in favour?
C. How would the situation change is the distribution of benefits were not uniform, but skewed towards the poorer members of society?