Equity in the distribution of income

1. Progressive taxes Advantages

1. As income increases, the fraction of income paid as taxes increases; there is an increasing tax rate. 2. Since it is unfair for the economy to have the same tax due to the fact that lower-income earners need to use more of their income to meet basic needs and could reduce their well-being, it is more equitable for those with higher income to pay more since they can afford it. 3. Progressive income tax narrows/ decreases the income gap between rich and poor and it is seen as achieving a greater equity. 4. The more the progressive a tax system is (i.e. the more rapidly the average tax rate increases as income increases), the greater the income redistribution achieved. So the government could raise the taxes on higher levels on income or lower the taxes on lower levels of income. 5. The resulting tax revenue received from the progressive taxes can be used too provide the government funds to finance its expenditure as well as redistributive policies. For example, merit goods and transfer payments, universal basic income.

Universal Basic Income (Disadvantages)

1. Giving money to people will make them lazy and they will stop working or looking for jobs which leads to a less effective economy and worsen the labour and skills shortages a country might face. 2. It would be too expensive. All households ( like higher-income groups) do not need it would receive it. It requires high implementation costs serious cuts in other services such as transfer payments to vulnerable groups. Opportunity costs of government spending. 3. UBIs are also less cost-effective than targeted welfare programs because many people lack more than just cash. UBI does not cure addiction, poor health, lack of skills, or other factors that contribute to and worsen poverty.

3. Differences in human capital

1. Higher skilled workers tend to receive higher wages given the Low supply. 2. Lower skilled workers are given lower wages due to the higher supply. This gives rise to inequality. 3. However, wages of skilled workers have risen at a higher rate than the unskilled workers leading to increasing inequality. 4. The reduction in trade union power in many countries meant that low-skilled workers have lesser job security and protection from falling real wages.

1. Progressive taxes (Disadvantage)

1. Higher tax rates discourage people from working harder, moving into higher-paying jobs, and taking risks because they are afraid of losing their own gains to higher taxes. People will have fewer incentives to strive harder and improve their economic situation if they believe their hard work will simply result in them having to pay a higher tax rate. 2. Higher taxes could discourage entrepreneurial activity and even encourage entrepreneurs to leave the country in favour of more "favourable" tax climates. 3. Taxation is an incredibly complicated process with ample room for error and manipulation. Government may earn lesser revenue than expected as people will find ways to avoid paying taxes by making false statements on their income. 4. Despite these arguments, there is little evidence that such potential disincentives would have a significant impact on the economic well-being of the population's high-income earners. It could be argued that the benefits of greater equality outweigh any costs to those with high incomes.

Why the market system does not result in an equal distribution of income?

1. In the market system, the amount of income received is based on the ownership of factors of production. However, ownership of FOPs is highly unequal and because the prices of these FOPs determined in the market vary enormously. 2. Some people possess additional FOPS of land & capital for which they receive rental, interest and profit income. While others may have none to sell (unemployed, sick, young). 3. Some people are able to receive very high wages due to their special skills and education, while others receives wages so low they are unable to pay for their basic needs due to their lack of skills,education and talents. 4. Therefore, these FOPs are highly unequally distributed.

Causes of Inequality and Poverty

1. Inequalities of opportunities 2. Discrimination 3. Differences in human capital 4. Differences in ownership of resources 5. Globalisation and technological progress 6. Market- orientated, supply-side policies 7. Government tax and benefits policies 8. Unequal status and power

2. Discrimination

1. Inequality may be a result of unfair treatment or discrimination against certain people due to factors including , gender, race, ethnicity, age, religion, socio-economic status. 2. Discrimination manifests in both opportunities that people face and outcomes that they obtain. For example, lower-come children are discriminated against as they do not receive the same educational opportunities as high-income children and as a result are unable to secure higher paying jobs. 3. Wage discrimination contributes directly to inequality. It occurs when workers in similar positions receive different wages on the basis of gender, race, ethnicity, etc. or any other characteristics that are not related to their skills or productivity.

Universal basic income

1. It is intended to provide residents in a country with a sum of money that they would receive regardless of any other income they may have. 2. It reduces income inequality and poverty. 3. Based on the principle that everyone in the society is entitled to a basic income. 4. Increasing popularity in view of growing income inequalities and fear that new technologies will lead to job loses in the future.

Consequences of poverty

1. On economic growth 2. On living standards and social stability

4. Differences in ownership of resources

1. Ownership of physical capital such as companies allow people to earn profit. 2. Ownership of financial capital such as company shares allows people to earn shares of the profits through dividends. The more physical and financial capital they own, the higher their income. 3. In contrast, lower income people do not own capital; an income comes from wages and salaries. Therefore the unequal ownership of capital increases inequality. 4. {maybe can follow the same points are why market unequal distri. of income}

1. Inequality of opportunities

1. People are born into different conditions, so they also face different opportunities as they grow up, get an education and find employment when growing older. The fact is that the opportunities people face are unequal. 2. A child born into a middle or high-income family is likely to have better opportunities as well as a greater access to good health care and a better socio-economic situation. Their opportunities will allow them to achieve their potential. 3. A child born into a low-income family is faced with fewer opportunities. They may become ill because of poor nutrition or suffer health problems due to their lack of income. Children living in relative poverty may quit school as they see no future in education and so leave with a lower level of skills and education. 4. Therefore, it will be hard to find a job and earn a decent level of income. (they will spend most of their income on basic necessities).

2. On living standards and social stability

1. People will have to make difficult choices about how to spend their limited incomes which will result in lower living standards which is associated with greater levels of stress, poor nutrition, etc. 2. Lower-income areas may suffer from poor infrastructure (especially roads) and facilities so this limits opportunities. The inadequate roads and poor road access put high cost of transportation and poor facilities reduce ability to access high quality inputs. Which will overall lower standard of living. 3. Increased criminal behaviour so people in impoverished areas may feel unsafe and law enforcement may not deal with the dangers. 4. With significantly amount of people living in relative poverty, they will perceive it as unfair and not working for them and therefore are unlikely to support the political system and democratic process. This will lead to tension between Low-income groups and the government.

Positive impacts of inequality (on economic growth)

1. Some degree of inequality is inevitable and even necessary. 2. When there are some gap between the rich and poor it gives the people the incentives to work harder and gain a better education. 3. It also encourages entrepreneurship, since those who innovate and do well can enjoy the financial benefits of their risk-taking. 4. All these are important for individual seeking to improve their own well-being but is also important to the overall improvements to productivity and output in the economy.

Policies to reduce income inequality and poverty

1. Taxes: direct, indirect, progressive, proportional and regressive taxes 2. Investment in human capital 3. Transfer payments 4. Targeted spending on goods and services 5. Universal basic income 6. Policies to reduce discrimination 7. Minimum wages

Universal basic income (Advantages)

1. The amount given would be enough to meet basic needs, preventing people from living in poverty. Which will improve a range of mental health concerns and lead to increased happiness and life satisfaction. This will act as a motivator as people will still want to improve their economic well-being and thus will work to earn more. 2. UBI would also assist people, mostly women and children, in leaving abusive relationships. Domestic violence is more common in poorer households, where victims lack the financial resources to escape. UBI may help to prevent the negative childhood experiences that are thought to contribute to mental illness and other problems later in life. 3. UBI gives people the opportunities to do many things that are good for themselves and the economy. Possibilities include: returning to school to improve skills and education to get a good job, starting a business, give employees the financial security to leave a bad job, or wait until the good job comes along to (re)join the job market, it also enables people to stay in school longer and participate in training to improve skills or learn a trade.

Difficulties of measuring poverty

1. There are many different types of poverty including absolute, relative, extreme, acute, income and multidimensional poverty. Each type of poverty has its own definition but may vary from country to country. Therefore it will be difficult to define. 2. Some elements of poverty that are difficult or impossible to measure. For example, people living in poverty suffer feelings of uncertainty, vulnerability and fear. These are all hard to measure so simple income measures of poverty do not capture this. 3. It is measured with the use of household surveys raising issues like: -information provided by households that are surveyed are subjective. - surveys do not include homeless people/ people in institutions. -income figures may be understated (lesser than actual) where there is freelance work or income from investments. - requires an enormous amount of resources.

Transfer payments

1. They are payments made by the government to individuals specially for the purpose of redistributing income away from certain groups and towards other groups. 2. Transfer income from those who work and pay taxes towards those who cannot work and need assistance. It is to improve the likelihood of the less fortunate members of society. 3. Government uses tax revenue to redistribute income and provide assistance to particular groups in the economy to improve their SOL. 4. Examples of people who receive transfer payments are older people, sick people, unemployed people, etc. aka the vulnerable groups .

Transfer payments Disadvantages

1. Unemployment benefits (the programs) are disincentives for unemployed people to look for work that would shorten their period of unemployment and be productive as they will tend to be lazy and they will also rely more on govt assistance. 2. The result of this extra burden on the govt in terms of unemployment and other benefits as well as higher unemployment rates causing outputs and production of economic activity to be lower. 3. They are excluded from GDP (= C+I+G+(X-M)) calculations since they are not part of government spending and just a reallocation of money from one party to another without exchanging goods and services in return. Thus do not represent expenditure.

Transfer payments Advantages

1. Unemployment benefits act as automatic stabilisers, reducing the effects of short-term fluctuations in economic activity, eg. sudden increase or decrease in the economy's national income, growth, productivity, consumption. Thus lessening the severity of recession or inflation. 2. Unemployment/ inflation decreases which will lead to the improvement of resources. 3. Programs like old-age & disability pensions, student grants and unemployment benefits are often introduced during an economic recession. Since the economy is struggling, many people lose their jobs and income thus difficult to sustain daily lives but with the help of the government, they can still eat and maintain consumption. 4. It can also stimulate the economy. It is considered to be able to prevent the economy from getting worse and it could generate more spending than just the given amount. Eg. the unemployed people don't have to spend all of their money on consumption. but their demand for G&S can still be positive since their consumption is stable.

Relative poverty

A measure of number of people in a population with an income level below a predefined level that changes over time, and it is defined as a percentage of society's median income. Poverty that is "relative" to other people's income reflects the idea that people should be able to afford a lifestyle typical of their society. The greater the unequal distribution of income the greater the degree of relative poverty.

Absolute poverty

A measure of the number of people in a population with an income level below a predefined "poverty line" that is the minimum income necessary to satisfy basic physical needs.

Gini Coefficient

An indicator that neatly summaries the information presented on the Lorenz curve. Measures the income distribution of a country's residents. Formula: area between the diagonal and Lorenz curve / entire area under diagonal. (Eg. A/A+B). Gini Coefficient ranges between 0 and 1 (100), with 0 representing perfect income equality and 1 representing prefect income inequality. The larger the Gini Coefficient the greater the income INequality.

Lorenz curve Model

It is used to show the degree of income inequality in an economy. It is a visual representation of income shares received by percentages of the population (the income distribution data). The model is useful in 2 ways: It compares 2 or more countries in terms of income distribution or the change in income distribution for a single country over time. X-axis shows the cumulative percentage of total population divided up in quintiles. (20%, 40%, 60%, 80%, 100%). Y-axis shows the cumulative percentage of total income earned b the quantiles. The diagonal line of absolute equality indicates a perfectly equal distribution of income. The further away a Lorenz curve is from the line of equality, the more unequal the distribution if income.

Equality

It means each individual or group of people are given the same resources and opportunities.

Equity

Recognises that each person has different circumstances and allocates the exact resources and opportunities needed to reach their full and healthy potential (each an equal outcome). The differences that exist among people due to factors like sociology-economic background, race, gender.

Poverty

Refers to the inability to satisfy minimal consumption needs. (Eg. Food, water, shelter) due to low income.

1. On economic growth

{follow positive impacts on inequality) 1. Large gaps between rich and poor provide incentives for entrepreneurship and innovation. 2. The attractiveness of high incomes gives the lower paid income group the motivation to work harder and improve their education and skills so that can move to higher paid jobs. 3. When the gap is smaller, there are fever incentives. 4. Inequality harms the economic growth as there will be fewer opportunities. 5. Uneducated people may lower productivity levels which will damage economic growth.