3.6.3 The impact of inequality on economic agents

Question 1

Impact of inequality on individuals

What kind of goods/services?

Answer 1

Lower incomes due to gretaer inequality means reduced levels of consumption as purchasing power is low. Inability to purchase merit goods and services such as education and health which will affect their human capital and labour mobility. Aldo can further increase the levels of inequality between individuals. Also with little income left after consumption of essentials goods, it means individuals cannot save and thus purchase assets increasing wealth inequality. Also means cannot gain income from assets.

Question 2

Impact of inequality on firms

Answer 2

Low levels of consumption due to poor purchasing power and so MPC for low income housholds will be close to 1. As a result of lower levels of demand, gretaer stagnation within economy and poorere levels of productivity from frims as not incentivised to be more productive and focus on meeting the needs of consumers as productively as possible. Firms gain lower sales revenue as a result and profit margins fall.

Question 3

Impact of inequality on the economy

Answer 3

The government will try to redistribute income and wealth in order to reduce inequality. This is done through taxation which is the governments revenue. As a result opportunity cost created, less investment and expenditure in infrastructure will prevent economic growth in the long run. Those with poorer income may feel excluded from society and feel demotivated leading to greater welfare loss in soceity through negative externalities. Greater crimes in society. Inheritence tax as a form of government intervention to redistribute however may cause for those who earn greater incomes to save more leading to more withdrwals from the circular flow of income. Other methods of government intervention such as free state education or harsh regulation of monopolies to try and reduce inequality.