4. Equity Flashcards
Define equity.
Equity is defined as fairness in the distribution of economic welfare. All individuals in the economy have access to essential goods and services.
Explain how subsidies and grants alleviate inequity. State their limitations.
Subsidies decreases COP and thus increases supply, shifting the SS curve to the right. Government provides subsidies for the production of necessities, Eg. Education, healthcare etc. to make these goods more affordable for the poor. Since these necessities take up a much larger proportion of poor people’s income than rich people’s, such subsidies would have equalizing effect.
Grants are sums of money that a government gives to certain group of individual or households for a particular purpose such as education or healthcare. this has the effect of increasing disposable income. Thus DD for essential goods and services increases, shifting the DD curve to the right. Governments provide grants for the consumption of necessities. The distribution of grants is usually mean-tested. Grants could thus redistribute income from the rich too the poor and increases the ability of the low income group to consume necessities.
Limitations: government may have imperfect info on the amt of subsidies and grants that should be given. (Government failure) Strain on the government budget. (OC)
Define price ceiling.
Why should price ceiling be imposed?
How does price ceiling promote equity?
Explain, with the help of a diagram, the impact of an imposition of price ceiling on the market.
State its limitations.
Def: price ceiling is defined as the highest permissible price at which the producer can legally charge. It is considered effective only if it is set below the equilibrium price.
Why: price ceilings are most often imposed on markets for goods/ services that the government deems as essential, and/ or when the existing price for goods/services is excessively high.
How: Keep the price of the good low and affordable to consumers, such that all consumers, regardless of income, have access to this good/ service, hence promoting equity.
Limitations:
1. Long queues (inefficient, some buyers are worse off because they cannot get any of the good at all.)
2. Sellers ration goods according to their own personal biases
3. Rise of black market
Example (Diagram)
Define price floor.
Why should a price floor be imposed?
How does a price floor promote equity?
Explain, with a diagram, the impact of an imposition of price floor on the market.
Explain, with a diagram, the impact of minimum wage legislation on the market for labour.
State its limitations.
Price floor is defined as the lowest permissible price at which the producers can legally charge. It is effective, only if it is set above the equilibrium price.
Why/ How: often imposed on markets for goods/ services which frequently experience volatility in prices, or when the existing prices of goods/ services are deemed too low by the government. To ensure that producers/ workers have a certain level of income which would allow the to be able to afford and have access to essential goods and services, promoting equity.
Price floor leads to surplus, government can
- purchase the surplus of the good which can create a strain on the government budget
-artificially lower the supply by restricting producers through the imposition of quota
-attempt to increase demand or decreases supply
Minimum wage: take note of its implications (macro)
What is Gini Coefficient? How to interpret it?
The Gini coefficient is an indicator used to measure the level of income inequality of a country.
Range from 0 to 1
The larger the value of the Gini coefficient, the higher will be the level of income inequality.
