Volume 24, 2013
Proceedings of the Twenty-Fourth Annual Meeting
Bryan W. Husted, José Salazar
Pricing Social Externalities
The Case of Income Inequality
Using the Theil index to measure income inequality, we define a specific firm’s contribution to overall income inequality and propose a simple model to find the
equilibrium price for a given target of income inequality reduction. We first establish income inequality reduction targets for a population of firms. We then model a marginal income inequality reduction cost curve and match demand and supply to derive the equilibrium price. Using a small sample of fifteen firms, we simulate a market for income inequality reduction and calculate the equilibrium price.