Distribution of Income · Distribution of Wealth · Government Policies

Horizontal and vertical equity

Horizontal equity – implies that we give the same treatment to people in an identical situation. It makes sure we don’t have discrimination on the grounds such as race / gender / different types of work.

Example – if two people earn £15,000 they should both pay the same amount of income tax.

 

Vertical equity – Implies that people with higher incomes should pay more tax. This means that it wants to tax in a proportional or progressive way – People with more ability to pay should pay more tax. Therefore its important in the redistribution of income.

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.

 

Distribution of Income · Distribution of Wealth

Distribution of income and wealth

If we look at the distribution of wealth on the global scale then we can see that China and India have 30% of the population of the world however they only have 8%of the wealth in the economy. Now if we were to look at the distribution of income and wealth in the UK it will show that the issue is much more severe than some people think. The UK has a very high level of income inequality compared to other developed countries.

Although the amount of wealth is increasing in the global economy the gap between the rich an the poor is also increase. This relates to the concept of the trickle down effect. Globalisation and industrialisation has made the poor better off however it has made the rich much better off.