2.12 (The Market's Inability to Achieve Equity)

Question 1

Define equity.

Answer 1

The idea of being fair and just.

Question 2

Define equality.

Answer 2

The state of being equal with respect to something.

Question 3

Define income equality.

Answer 3

Everyone in a society receives the same amount of income.

Most countries pursue equity whereby efforts are made to reduce significant inequalities in income and wealth.

Question 4

Why do income inequalities exist?

Answer 4

• Variation in wages received for labour.
• Some wages so low that basic needs cannot be met.
• Some people want to work but can’t.
• Some individuals possess other factors of production e.g. land, capital, entrepreneurial abilities which tend to be highly unequally distributed across individuals in society.

Question 5

How are wage inequalities attempted to be corrected?

Answer 5

Free markets cannot ensure that everyone in the population will secure enough income to satisfy their basic human need, hence governments around the world use a variety of redistribution methods to change the market-determined distribution of income and output, and arrive at a more socially desirable outcome.

Question 6

Define income.

Answer 6

Flow of money received by the owners of the factors of production.

Question 7

Define wealth.

Answer 7

The money or things of value that people own.

Question 8

How can income and wealth be distinct from one another?

Answer 8

• Some people may have high incomes but low savings, hence low wealth.
• Others may have high wealth (inheritance/pensioners being asset rich) but low incomes.

However, generally higher income gives rise to the possibility of saving and creating wealth, hence, just as the free market economy results in income inequalities, so too wealth inequalities.

Question 9

What are key causes of rising inequality (7)?

Answer 9

• Skills bias arising from technological change- super high pay for some people.
• Rising share of capital income- concentrated among the rich.
• Tax systems have become less progressive and welfare cuts.
• Executive pay and bonuses rising faster than for ordinary employees.
• Rise in scale of in-work poverty, reduced employees bargaining power.
• Increasing urban-rural and deep regional economic inequalities.
• Hollowing out of employment in manufacturing, increasing economic inactivity.

Question 10

What are policies in the UK designed to lower the scale of income and wealth inequality?

Answer 10

Redistrbutive welfare transfers:

• Higher child benefit and the triple lock on state pensions.
• Expanded support for disadvantaged students in paying tuition fees.
• Public goods free at the point of consumption.
• Minimum income scheme and capital endowments for young people.

Progressive income, consumption and wealth taxes:

• Higher taxes on property.
• Increased income tax allowances and higher marginal rate on incomes above £100,000.
• Progressive consumption tax.

Strengthening wage floors and employment rights in the labour market:

• National Living Wage, rising minimum wage.
• Improved employment rights, affordable child care, tackling monopsony employers.

Tackling structural barriers to employment:

• Early years education and more nutritional school meals to improve brain development.
• Improved access to new technologies in disadvantaged communities.
• Better vocational education, coding, STEM subjects.
• Targeted measures to address long term unemployment/hysteresis effects.