The theory of diminishing marginal utility predicts that the more people eat the less utility they gain from each additional unit consumed. The marginal price of an additional unit of food at an all-you-can-eat buffet is zero; rational consumers will eat only until their marginal utility gain from an additional bite is exactly zero.
The marginal cost of remaining at the buffet is the value of the time spent on the best alternative activity. When the marginal benefit of that activity is greater than the marginal benefit of remaining at the buffet, diners will leave. Consumers optimize their choice when they are on the highest possible indifference curve given their budget constraint.
Under these circumstances, the budget constraint must pass through the indifference curve where it intersects the chosen point. There must then be at least a segment of the budget constraint that lies above up and to the right of the indifference curve associated with that choice. Any choice on that segment would yield higher utility. The single tangency point C in the figure is the only point at which this occurs.
Consider the utilitarian social welfare function and the Rawlsian social welfare function, the two social welfare functions described in this chapter. Which one is more consistent with a government that redistributes from rich to poor? Which is more consistent with a government that does not do any redistribution from rich to poor?
The Rawlsian social welfare function is consistent with redistribution from the rich to the poor whenever utility is increasing in wealth or income. The utilitarian social welfare function can also be consistent with a government that redistributes from the rich to the poor, for example, if utility depends only on wealth and exhibits diminishing marginal utility. However, the Rawlsian social welfare function depends entirely on the least-well-off, so it will generally prescribe more redistribution than the utilitarian social welfare function.
Think about your answer to part a. Show that government redistribution from rich to poor can still be consistent with either of the two social welfare functions. If utility depends only on wealth and exhibits diminishing marginal utility, and if efficiency losses from redistribution are small, then both the utilitarian and Rawlsian social welfare functions can be consistent with government redistribution.
A simple example can illustrate this point. Because the free market competitive equilibrium maximizes social efficiency, why would the government ever intervene in an economy? Efficiency is not the only goal of government policy. Equity concerns induce government to intervene to help people living in poverty, even when there are efficiency losses. In economic terms, a society that willingly redistributes resources has determined that it is willing to pay for or give up some efficiency in exchange for the benefit of living in a society that cares for those who have fewer resources.
Social welfare functions that reflect this willingness to pay for equity or preference for equity may be maximized when the government intervenes to redistribute resources. Draw the new budget constraint. The difference is that the all-leisure income is higher, but the slope of the line segment from hours of leisure to 2, hours of leisure is flatter. A higher income guarantee with a higher reduction rate is more likely to discourage work for two reasons.
First, not working at all yields a higher income. Draw a system of smooth indifference curves that bend the right way but would lead an agent to work more under the program you chose in part c than under the other program. Describe what seems extreme about these curves that leads to the unusual behavior. This is odd behavior. Moreover, as the graph indicates, the part b system makes the worker richer leaving them with more money for any given amount of work less than 1, hours.
One would typically expect that making someone richer would also discourage work by making earnings less pressing and encouraging extra leisure. Economically speaking, this is happening because these indifference curves imply that leisure is an inferior good for this individual.
Giving this individual more money is making them consume less leisure and therefore work more. And this inferior good effect is strong enough to outweigh the substitution effect coming from the lower effective wage in part c.
Such behavior is highly unlikely to happen in the real world. A good is called normal if a person consumes more of it when her income rises for example, she might see movies in theaters more often as her income rises.
It is called inferior if a person consumes less of it when her income rises for example, she might be less inclined to buy a used car as her income rises. Sally eats out at the local burger joint quite frequently. The burger joint suddenly lowers its prices.
Suppose that, in response to the lower burger prices, Sally goes to the local pizza restaurant less often. Can you tell from this whether or not pizza is an inferior good for Sally? You cannot. Since Sally eats at the burger joint quite a bit, falling burger prices imply that she is richer.
If this was the only effect, you could indeed conclude that pizza is an inferior good—Sally gets richer and buys less pizza. But there is also a substitution effect here: the relative price of pizza has gone up. This leads her to substitute away from pizza. If the substitution effect is bigger than the income effect for Sally, then she could respond in this way, even if pizza is a normal good. Suppose instead that, in response to the lower burger prices, Sally goes to the burger joint less often.
Since she actually consumes less of them, the income effect must be working in the opposite direction, leading her to consume fewer burgers and it must be stronger than the substitution effect. Since the fall of burger prices made Sally richer, burgers must be an inferior good for Sally.
Note: A good for which falling prices leads to reduced consumption is known as a Giffen good. Giffen goods are observed in reality very rarely, if at all. This is one of over 2, courses on OCW. Explore materials for this course in the pages linked along the left.
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Entrepreneurialism, previously seen as the domain of the private sector, is now characterized by the forging of public—private alliances. The entrepreneurial city model ushered in a new body of geographical literature on the politics of urban growth, one that continues to bear fruit today including non-Western and post-socialist cities; Olds, ; Pow, ; Wu, ; Ward, , ; Wu and Zhang, One book, entitled The Entrepreneurial City, focuses on how critical the concept of entrepreneurialism has become to the cross-disciplinary realm of urban studies Hall and Hubbard, ; also see Hall and Hubbard, Chinese cities like Guangzhou and Hangzhou are being remade in order to elicit political favors, and therefore the entrepreneurial actions of government officials in these cities are more strategic and prescribed than the simple enhancement of place for consumption.
Moreover, the lines of influence and power distribution among the two are constantly being readjusted, malleable in their functionality and better understood in relation to the everyday ties and challenges that arise among and between state and nonstate actors, rather than their reflection of formal rules and regulations that support the local state.
In HCMC, any dis- cussion about how the government should function must be weighed against how its entrepreneurial activities carry out speculative measures in conjunction with nonstate actors. Moreover, what sort of analysis would result from an entrepreneurial city form of non-Western governance in which nonstate firms, and the decisions they make that inform local state practices, are the very institutions under analysis?
Before I tackle those issues, it is necessary to describe the reform era in Vietnam itself, including the economic climate in the second half of the 20th century that in large part spurred these reforms. This reform package was introduced by the Vietnamese government as a set of national poli- cies that were to relieve widespread national poverty and integrate the country—armed with a young, educated, and inexpensive workforce—into the global economy.
The tone of the reforms, however, suggests that they are administered and carried out slowly and in an orderly, deliberate fashion by the Vietnamese Commu- nist Party.
In cases such as these, village government leaders would—based on their kinship ties to villagers—often turn a blind eye to such arrangements.
Indeed, this is a longstanding institution in business dealings throughout Vietnam, especially regarding tourism activities in HCMC as nonstate entre- preneurs seek a quick, efficient means of accomplishing their goals.
Local officials have their own intentions behind these charges. These arrangements are born out of negotiation, trust, risk, and reward; in other words, they are quintessentially entrepreneurial. Such examples introduce the breadth and embeddedness of coordinative arrangements undertaken by state and nonstate actors in Vietnam. These relationships transcend national initiatives such as the social evils program. They are also imperative for the economic success of urban residents, and in many ways the profits gained from informal, patron—client relationships can more regularly disbursed than for- mal wages.
In light of their weight in HCMC and Hanoi, these connections frequently drive local policy decisions. Under these circumstances, it seems unlikely that local administration would dismiss entrenched informal relationships in favor of broad national policy pro- grams like the social evils campaign. He continues to cite examples through the Communist takeover of South Vietnam in , when Party leaders were too occupied with enforcing economic regulations over large- and medium-sized private businesses in HCMC to be concerned with informal enterprise ibid.
Indeed, despite the strengths of the informal nonstate economy throughout recent history, it is clear that the local HCMC government has long worn many hats, not least of which is its operation in the private sector for entrepreneurial purposes.
In other words, the HCMC government has set up advantageous conditions to extend its rent-seeking endeavors. This maneuver is not a recent phenomenon. After the Indochina War officially concluded on April 30, , with 8 Discussions of why southern Vietnamese nonstate businesspeople have historically been treated differently in an entrepreneurial sense than the northern Vietnamese can be found in Chan et al.
Saigontourist was quickly created to fulfill this dictate in the urban tourism industry Gainsborough, Vietnam went from a command-economy state with decision-making centered in its capital, Hanoi, to a state with 59 provinces and five municipalities, each largely responsible for initiating and implementing their own economic initiatives. Gainsborough , p. Reflecting this greater autonomy, the size of the local government in HCMC was on a rising trend during the s, as indicated by the number of state employees.
The HCMC state acquires new avenues of political strength and, in an indication of the desire of the Vietnamese state to maintain economic regulations through its localities, allows the HCMC state government to financially benefit from increased nonstate invest- ment in the economies of real estate, infrastructure, textiles, and tourism ibid.
Certainly the urban state is more interested in extending political influence through entrepreneurial measures than the nonstate sector, but the empirical examples below reveal that divisions between the two are blurred and 9 The five municipalities—Can Tho, Danang, Haiphong, Hanoi, and Ho Chi Minh City—are all designated as municipalities with provincial status.
Instead of thinking solely about the ways in which the HCMC government rent-seeks under doi moi, or emphasizing the capacity of the nonstate sector to engage in the pursuit of prosperity in light of the latter, I have shown that HCMC provides a lens into the ways in which the divisions between the state and nonstate economies may be fuzzier today than ever before. Given this point, how do the state and nonstate negotiate entrepreneur- ship to harness capital? Empirical research conducted in and in HCMC addresses this question below.
Todd10 had recently returned to HCMC from Southern California, where he had been living since he and many members of his family fled Vietnam shortly before the U. His company was created during the summer of , in the opening days of the doi moi reforms. His finance degree from a prestigious U. Instead, he expressed shock as he relayed to me how the HCMC government interacted with his company at the time: My brother, who remained in the United States, helped our company cultivate numerous Vietnamese-American contacts to fund our business.
We also had a long list of Vietnamese living in Southern California, as well as other Americans, and they were interested in traveling to Vietnam. The Saigon12 government must have heard about our contact list, because one day they came in with the Saigon police and confiscated all of our computers, all of our accounting books, and all of our contacts lists.
There was nothing we could do! They said all companies must go through this process, even though I knew from friends that this was a lie. About three weeks later we got most of our paperwork back, and we immediately began calling all of our contacts to warn them about security breaches, identity theft, something like that.
A lot of them told us that other companies from Saigon were trying to sell them tours, sell them pieces of companies, and were even pushing them to fund new tourism companies! The worst thing was that they asked my clients what they were paying for trips to Vietnam and offered them a lower price!
The local HCMC state, now decentralized from the national government, faced with burgeoning nonstate competition and encouraged to engage in its own business activities without the promise of perpetual solvency from Hanoi, had turned to aggression in its dealings with competitors.
This meant that the officials in these cities have the same policy, decision-making, and voting author- ity as leaders in the 54 provinces of Vietnam. In rewriting the provincial map of Vietnam, Party authorities in Hanoi designated cities as the primary drivers for Vietnamese devel- opment.
When I asked Todd how he knew the police and auditors were from the HCMC police, rather than the district or ward police, he told me that the city police wore different uniforms than the district police personal interview, July 29, His informal discus- sions with other newly minted entrepreneurs who were harassed by the police and offi- cials confirmed that his situation with respect to the local authorities was not an isolated incident.
These interactions posit that local HCMC officials—wary of a more level playing field and worried about the viability of their own tourism businesses in light of their new autonomy from the central state— worked in coordination with local police in bullying new nonstate businesses. Many nonstate entrepreneurs were inspired by the market reforms to establish new businesses through- out the city. These new market entrants were exploited by the local state for its own ends. These acts represented the costs of operating a nonstate business in HCMC in the early years of market reform.
The local state used bullying tactics to wrest innovation, contacts, and by extension, capital from their nonstate competitors. But as Todd noted later in the interview, one of the results that arose out of paying fees, being forced into audits, and attending meetings was that employees of his company began developing a relationship with local government contacts.
And now, when Todd needs a favor from the government, such as a permit to travel to a politically unstable region in the country or a special dispensation for trav- elers with expired visas, he need only invoke the years in which authorities preyed on his business and the officials usually acquiesce to his needs personal interview, July 29, In these ways, Todd and other nonstate tourism operators like him, though not neces- sarily changing local policies, are proving that local entrepreneurial policies are contra- dictory and in flux.
They are not based solely on the characteristics of advanced capitalist urban entrepreneurship but by localized ways of doing business in HCMC. These nascent, difficult encounters between the state and nonstate were the seeds from which a new form of entrepreneurialism was to emerge. The next example highlights a form of entrepreneurial action in HCMC that more closely resembles one that may occur among Western city entrepreneurs, and is set in the context of a joint venture partnership between a foreign-owned company and a local HCMC organization.
An example of these changes comes from a French- owned joint venture tourism company that began operations in the mids. Officially, he said, a foreign-owned company that wished to promote and market tourism offerings within Vietnam must partner with an SOE or government-backed organization personal interview, February 8, Additionally, foreign-owned companies cannot own their own transportation, purchase land or real estate, or hire their own tour guides who must be hired as independent contractors.
They also desired to market tourism offerings to the burgeoning middle class in Vietnam, which has become a sizeable market niche in its own right. As a foreign-owned tourism company executive named Paul remarked to me when I asked him why his company had not chosen to partner with a local governmental unit, he stated, The government never has any money.
They are always asking us to give money for them to go on roadshows, to promote Vietnam around the world. Personal communication, March 15, The decision to establish a joint venture thus seems to be a difficult and tricky deci- sion, with a high degree of risk attached.
Under traditional under- standings of the coordinative urban entrepreneurial relationship, the public sector is seen as the chief decision-maker in the relationship. However, in the case of the HCMC tour- ism industry it is the nonstate sector that weighs the pros and cons of coordination and only partners if the conditions are optimal.
That said, there is less of a separation between 13 Lloyd provided a more comprehensive explanation of the differences between SOE, foreign-owned, joint-venture, and local nonstate tourism companies. These differences are less important in my analysis, where they are constantly being undermined and thus their legality questioned. Critically, Mark struggled when pressed to name the local HCMC state body his com- pany has forged a joint venture with.
This comment suggests joint ventures are shared partnerships in name only, with the 50— 50 stake in the decision-making and profit-sharing of the joint venture merely an illusion. When I pressed Mark about how profits were distributed between the two entities, he was similarly vague.
The first is that Mark does under- stand how profits and decision-making are shared but is reluctant to explain them.
This is certainly plausible in light of Western notions of ethical business standards and their weak application to a Vietnamese case study. He may have felt I would not understand, or would disagree ethically with the financial dealings between the two groups. On the other hand, and the conclusion I chose to draw, is that Mark cannot adequately explain the parameters of the relationship and so he leaves them unclear.
That the relationship has flourished for well over a decade proves that both groups find it useful. Within the broad terms Mark described, however, there seems to be much room for maneuvering by both the state and nonstate. The exact dimensions of the entrepreneurial affiliation between the two groups seem less important than the value each group draws from it. I turn now to the entrepreneurial practices of a local, nonstate tourism exec- utive, how these practices are appropriated by SOEs in HCMC, and how this coordination further displays the messiness of the state—nonstate divide and underscores that non- Western cities depart from Western notions of urban entrepreneurship.
Working Together? He soon became fluent in English the de facto language of the tourism industry in HCMC and then decided to pay a visit to a well-known, locally owned, nonstate tour company in HCMC to enlist his services as a guide. He quickly rose up the corporate ladder at his company due to his entrepreneurial scheming.
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