Redistribution of income and wealth

1. Redistribution of income and wealth Learning outcome AA • Explain the problem of unequal distribution of income • Differentiate between absolute and relative poverty • Describe the difference between income and wealth • Evaluate the different policies to redistribute income • Explain the trickle down effect Reading: Unit 69

2. Redistribution of income and wealth • The free market is likely to lead to a situation where income and wealth are not distributed evenly amongst the population • This inequitable distribution of income and wealth can be described as market failure

3. Why is the uneven distribution of income and wealth a problem? Absolute poverty • Absolute poverty exists when an individual does not have the resources to be able to live i.e. food, water, clothing, shelter, basic health care etc. • In extreme cases some members of society may die from being in absolute poverty, this is clearly inequitable

4. Why is the uneven distribution of income and wealth a problem? Relative poverty • Relative poverty exists when people are living far below average living standards existing in their country or area • If the gap between the rich and poor (those in relative poverty) is too great it creates social problems

5. Why is the uneven distribution of income and wealth a problem? Lack of horizontal equity • When people at the same level in society are not treated equally • Example: women being paid less than men for doing the same job • Example: discrimination against people from different races • This lack of equity may create social problems

6. Why may the uneven distribution of income and wealth be a good thing? Economic efficiency • The differences in income levels may motivate people to work harder or get a higher level of education • The competition creates a greater level of efficiency in the economy

7. Measuring the distribution of income in an economy • We can plot the % of income against the % of households in an economy • This gives us a picture of the level of equality that exists in terms of income distribution • The diagram is known as the Lorenz curve

8. Measuring the distribution of income in an economy • Imagine that everyone in society had the same level of income i.e.

9. Lorenz curve

10. Measuring the distribution of income in an economy • If income is not distributed evenly then the Lorenz would not be a 45° line i.e.

11. Lorenz curve

12. Measuring the distribution of income in an economy • The further the Lorenz curve is from the 45° line the greater the level of income inequality