4.1.7.1 the Distribution of Income and Wealth

Income

A flow of money going to factors of production wages, benefits, dividends, rental income or interest

Social Unrest

Crime rates may rise, this may be because people need necessities, more must be spent on prisons and policing - however this is injection > but its spending on economic bads thus doesn't add to societies welfare, rather restores it to where it should be

Existing Wealth

Owning Assets means you can generate income which can provide further wealth

Course Objectives

Difference between Income and Wealth Difference between Equality and Equity in relation to distribution of income and wealth Various Factors influencing Income and Wealth Lorenz Curve and gini coefficient Pros and Cons or more equal/unequal distributions

6 Costs of Unequal income Distribution

Diminishing Marginal Utility of income Reduction in Spending Power via MPC May represent Monopoly Power Reflection of Monopsony Buying Power Social Unrest High Income due to Inheritance, (no effort)

Functional Distribution of Income

In UK around 70% of national income goes to workers, in 1975 it was 78% but fell, Entrepeneurs are getting much more profit

5 Benefits of Unequal Income Distribution

Incentive to Improve Skills Redistribution of Income is Unfair Labour is Not Homogeneous People have different Values Represents the reward for Risk Taking

5 Factors Influencing the Distribution of Wealth

Inequality of Income Existing Wealth Inheritence Traditions Government Policy Propensity to Save

Government Policy

Inheritance tax is the main form off taxing wealth, however it's not as effective as originally intended - give to spouse or other, only included in estate tax for 7yrs

Market Structures

Markets dominated by Monopoly and Monopsony power tend to increase inequality

7 Factors Influencing the Distribution of Income

Skills and Qualifications Education Inequality in Levels of Wealth Household Composition and Age Government Policy Market Structures Functional Distribution of Income

Inequality of Income

Wealth comes from accumulations of assets - high incomes means more assets can be purchased

Vertical Equity

Where different individuals are treated differently in different circumstrances it recognises that people are different and should be treated differently but that there should be fairness in the way they are treated ie. rich people should pay more tax

High Levels of Education

Workers with degrees tend to earn much higher wages than those who are without education is often determined by a families background and wealth, education also is key in reducing inequality

Wealth

a Stock Concept held in different ways - savings held in bank deposits, - ownership's of shares, - owning property and assets, - corporate bonds,

Gini Coefficient

a commonly used measure of income inequality condenses the entire income distribution for a country into a single number between 0-1 0 mean perfect equality - 1 means perfect inequity

Lorenz Curve

a diagrammatic way of presenting inequality, Y - % of income X - % of the population each point indicates the % of income held by a particular % of the population complete equality would occur if each quintile/decile etc. has exactly the same % of income/wealth

Equality

a measure of the extent to which different individuals have the same level of income this is a positive concept as it can be measured using factual data on income and wealth measured using lorenz curve or Gini coeffcient

Gini Coefficient: Formula

area between the lorenz curve and line of absolute equality ------------------- area underneath the line of absolute inequality A/(A+B)

Reflection of Monopsony Buying Power

as TU power decline entrepreneurs have more power of wages atm many wages are decided through individual meeting between workers and employer, their is a considerable imbalance here

Government Policy

different gov. value inequality differently, also they use dif. methods government currently encourages workers to seek employment rather than benefits, if everyones in employment GDP should increase thus income on the whole, however if this doesnt work inequality likely gets greater

Equity

examining the desirability of the extent to which different individuals have the same or different levels of income or wealth equity is a normative concept as it's a value judgement on what's considered fair

Inequality in Levels of Wealth

families with high levels of wealth can - earn profit if the wealth is a business, - interest if its capital or rent if its land - also they have labour to offer in return for income thus owners of wealth have potential to generate much higher levels of income in various forms than those who don't

Reduction in Spending Power via MPC

high incomes have lower MPC thus GDP isn't as high as it could be if income was redistributed to those with higher MPC - IMF estimate 1% grow in top 20% income share slow growth 0.8%

Skills and Qualifications - 2 reasons

high skilled workers are likely to be able to sercure higher incomes for 2 reasons - higher MRP causes higher demand for labour to increase, they can generate much more output - less workers/supply for high skill jobs, less supply increases wages

People have different Values

if a person benefits from lifestyle and family at the expense of work then they shouldn't expect income to be redistributed to them

Represents the reward for Risk Taking

in UK inequality is largest among self-employed, high incomes here are often earned by those who take the most risk allowing this encourages risk-taking thus innovation.

May represent Monopoly Power

in UK market failure is often caused by >Oligopoly who restrict output and charge high prices in this way the inequality reflects a poorly performing economy misallocating scarce resources. Redistribution of income is therefore a way of overcoming this market failure

Inheritance Traditions - 2 ways

in UK tradition the Eldest son inherited an estate, high value assets remain with single individuals also wealthy individuals have also married other wealthy individuals

High Income due to Inheritance, (no effort)

in some cases people are wealthy due to inheritance here the argument of an incentive to work harder doesn't apply

Redistribution of Income is Unfair

many may argue it's unfair to take money from those who've worked hard and contribute a lot to the economy and give it to someone who had the opportunity but cba

Propensity to Save

people with a high income have a higher propensity to save as they can satisfy their wants without spending most of their income increased savings will represent an increase in holdings of wealth, thus further increasing inequalities in the distribution

Reduction in Spending Power via MPC: Evaluation

resources are fully employed - inflation

Labour is Not Homogeneous

some people have valuable skills, if people want to see a good film only a few people can act well enough, thus they should be paid more

Incentive to Improve Skills

the ability to obtain a higher income incentives workers to stay in education and develop skills increasing Productivity this boosts entire GDP so we all benefit, tickle down

Household Composition and Age

the number of dependent children or working adults can have a big influence on the average or total income of a home. a home with 2 working adults and 2 grown children in employment will tend to have a high total income vs 5 kids with 1 adult age will correlate with wage due to experience

Diminishing Marginal Utility of income

their is a point where the extra spending enabled from a higher income stops granting as much satisfaction economic welfare measures how many wants are satisfied so taking money away from those who don't get much benefit and giving it to those who do makes sense

Horizontal equity

where identical individuals are treated the same ie. those who earn same are taxed same