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3. Suppose that there are two income groups, the rich (r) and the poor (p). Each utility function is denoted by uj = In(m;) where

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3. Suppose that there are two income groups, the rich (r) and the poor (p). Each utility function is denoted by uj = In(m;) where m; is income for i = r, p. According to Okun's leaky bucket, there are efficiency costs of redistribution represented by a constant marginal cost c (c > 0). Under the distorting taxes and transfers, define the efficiency costs and justify inequality in income distribution

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