Distribution of Income · Distribution of Wealth

Costs and benefits of a more equal/unequal distribution

Equal

Benefits-

  • Consumption will increase so demand will also increase in the economy
  • Will help reduce poverty
  • More equal societies are more capable of dealing with problems like extreme weather so there can be environmental benefits

Costs-

  • Wealthier individuals would lose money so they wont be able to provide funding to things like charities
  • Incentives to set up businesses decreases if their profit will be taxed away

 

 

Unequal

Benefits-

  • It could be economically beneficial to businesses who have taken risks
  • Trickle Down Effect. If some people gain extra income, then this can ‘trickle down’ to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide incomes for other workers.
  • If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output

Costs-

  • Negative impacts on the growth of the economy
  • Likely that the only people who will benefit are the highest earners
  • May reduce demand due to lower incomes
  • An increase in inequality would force more people into poverty
  • Arguably inequality can lead to social friction. It can be a factor in precipitating riots or higher crime levels. In this case all members of society lose out.
  • The biggest cause of relative poverty is unemployment. Unemployment is considered a type of market failure because it represents an inefficient allocation of resources in a free market.

 

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