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.