Question

Here is a second hypothesis: A well-funded social safety net may lead to less regulation of the market economy. Explain why this might be so, and sketch a production possibility curve that shows this tradeoff.

Short answer

Social safety net leading to less regulation of the market economy may allow society to have both higher economic equality and higher economic output at the same point in time.

Step-by-step solution

Step 1. Social safety-nets

Social safety-nets indicate some welfare programs, funded by the federal government, for raising the social welfare of the poor or the low-income groups in society.

Step 2. Economic output and economic equality in the context of the social safety net leading to less regulation of the market economy 

A well-funded social safety net may lead to less regulation of the market economy. If society does not do any effort for lowering poverty and income inequality, people may go against the market forces. People might demand for laws that would forbid employers from firing workers or lowering wages, or policies of imposing price ceilings and price floors in the market. From this point of view, safety nets that reduce inequality may not let economic output fall by allowing markets to operate with the help of the social support built. There will have some possibilities along the PPF of attending both the higher economic output and equality at the same point in time. In the below diagram, a movement from point C to D allows both the economic output and equality to rise, and even a movement from point D to E allows a rise in economic equality for a very little fall in the economic output. But, if economic equality tends to be very high, like a movement from point E to point F, economic output falls and the trade-off between the two exists.