1.7 the distribution of income and wealth: poverty and inequality Flashcards
absolute poverty
when a person doesn’t have enough income to fulfil basic needs
distribution of income and wealth
the way in which total income and wealth are divided among the population of the economy
earnings trap
situations where the more an individual earns, the less they are entitled to, making it hard to escape poverty
equity
fairness, justness
involves value judgements
fiscal drag
as wages rise, a higher proportion of income is paid in tax
gini coefficient
measures income or wealth inequality; maximum inequality is 1
horizontal equity
people in identical circumstances are treated equally
hysterisis
effects that persist even after the initial causes giving rise to the effects are removed
kuznets hypothesis
theory that as an economy grows, inequality is initially increased, then decreased
lorenz curve
can be used to illustrate and measure distributive inequalities
means tested benefits
entitlement to certain benefits depends on whether the income or wealth of an individual is below a certain level
poverty trap
where a rise in income leads to a decrease in eligibility in benefits, forcing individuals deeper into poverty
vertical equity
people in different circumstances are treated unequally, yet fairly
real life example of effects of poor education
in Madagascar in 1975, the president Ratisaraka decided that he no longer wanted French to be the spoken language in Madagascan classrooms
he wanted Malagasy to be the spoken language instead
he banished all French teachers
‘The Lost Generation’ - students who barely learnt anything
most of the well-paying jobs required French to be spoken
Malagasy speakers had to take extremely low paying jobs
consequence of a fall in the standard of education
fall in the standard of education
an increase in unemployment
incomes fall
increase in absolute poverty
effects of good education
increase in skills
increase in productivity
increase in demand for higher salaries
fall in relative poverty
effects of education and training
increase in productivity
increase in income
decrease in poverty
the world bank’s definition of absolute poverty
living below the absolute poverty line of $1.90 a day at 2005 GDP measured at purchasing power parity
purchasing power parity
how much of one currency is needed to purchase a basket of goods compared to another currency
in 2013 how many people were estimated to be living in absolute poverty
767 million people
over 96% of these people were in developing countries
what is relative poverty defined as in the UK?
<60% median income in the UK
average income in the UK is £27,000
poverty line is £16,320
factors that influence poverty rates
economic growth
leadership
deworming children
fighting domestic violence
free school meals
women’s rights
planting trees
mosquito nets
example of how infrastructure in India helped reduce poverty
improvements in telecommunications in India like new fibreoptic cables and tall cellular radio towers have allowed India’s call centre industry to flourish
hiring more workers
raising income
lifting Indian workers out of poverty
possible limitation of providing AID to help reduce poverty with example
aid money could go into corrupt politician’s pockets
in 2011 Somalia received $1.3bn in aid
70% of the aid had ‘disappeared’ and went into corrupt politician’s pockets instead
there was little to spend on healthcare and schools, workers couldn’t become more productive
poverty stayed the same
example of UK providing foreign aid
in 2018 UK donated £374m aid to Pakistan in 2018
spent majority of aid on healthcare and education
better education - better knowledge and skills
better healthcare- increased health, workers can work longer and concentrate more
can command higher salaries as more productive
Pakistan’s GDP rose by over $100
higher salaries lead to a decrease in povertyn
negative externalities
costs which affect third parties outside the price mechanism
social costs
private costs + external costs
costs to everyone in society
private costs
costs to group inside price mechanism
external costs
costs to group outside price mechanism
negative externalities of production
SC>PC
goods are being overproduced when there are negative externalities as more is being produced than what benefits society
negative externalities of consumption
PB>SB
more is being consumed than what is best for society
demand decreases if you take into account social benefits
how can the government stop overconsumption or overproduction?
by intervening with a tax
could be direct or indirect
complete market failure
when the market wouldn’t exist without government intervention
only seen in certain public goods
market completely fails to provide a public good at all
partial market failure
market exists but doesn’t work perfectly
e.g. market for education
some education is provided but too little is consumed
7 types of market failure
negative and positive externalities
public goods
information gaps
merit and demerit goods
monopoly power
factor immobility
inequitable distribution of income and wealth
3 types of market imperfections
information gaps
monopoly power
factor immobility
merit goods
goods that are under-consumed, have positive externalities and information gaps
example of a merit good
education is under-consumed because of information gaps
don’t have full information about the benefits
individuals who apply for university only consider the private benefits and ignore all social benefits such as an increase in tax revenue for the government
demerit goods
goods that are overconsumed, have negative externalities and information gaps
example of a demerit good
cigarettes
passive smoking can lead to lung cancer
younger consumers aren’t informed of full health costs
value judgements
an evaluative statement of how good or bad you think an idea or action is
how could alcohol be deemed as having positive externalities?
e.g. a sober person having more fun at a party because other people are drunk
they are outside the price mechanism
imperfect information
consumers or producers lack information needed to make an informed decision
more information closes the information gap
types of imperfect information
incomplete information
asymmetric information
incomplete information
when someone doesn’t have full information about the benefits or costs of their decisions
e.g. 7 year old child can’t see long run benefit of education
40% of young adults without GCSE’s are unemployed
asymmetric information
when one party knows more than another party in a transaction
e.g. buying a phone on ebay, could get ripped off and waste money
how can the government solve underconsumption?
regulation
e.g. legally requiring students to stay in education till age 18
information provision
providing info on the benefits of education
subsidies
subsidising tuition fees
supply increases, price decreases
how can the government solve overconsumption?
regulation e.g. legally banning public smoking
information provision e.g. adverts on the costs of smoking
indirect taxes e.g. specific taxes of cigarettes, increases price and decreases quantity demanded
how taxation can reduce negative consumption externalities
can be solved through an indirect tax
paying indirect tax would increase costs for producers because they’d have to pay an extra tax to the government on top of all their other production costs
producers will respond with an inward shift of the supply curve as they are willing to supply less for the same price
how can minimum prices reduce overconsumption
min price introduced
prices are higher
QD is lower
overconsumption is reduced
disadvantage of minimum prices
only works if price is set above equilibrium price otherwise overconsumption won’t decrease
social benefit
external benefits + private benefits
market failure
when price mechanism leads to a misallocation of resources
geographical immobility
barriers faced by people moving from one area to another to find work
worker will stay unemployed which is a market failure
occupational immobility
lack necessary skills to have job
what does occupation immobility lead to?
structural unemployment
why do labour markets fail?
factor immobility
how can the government fix occupation immobility?
education
training
apprenticeship schemes
how can the government intervene to fix geographical immobolity?
improving transport e.g. HS2
relocation subsidies to help cover the costs of moving
