5.9 Income Inequality Flashcards
What is the price mechanism?
The price mechanism is a non-personal way of allocating resources that determines the prices of goods and services in the market through the interaction of demand and supply.
What does an efficient allocation of resources mean according to the price mechanism?
An efficient allocation of resources, according to the price mechanism, means that there are no surpluses or shortages in the market.
Does the price mechanism differentiate between needs and wants?
No, the price mechanism does not differentiate between needs and wants.
What is the problem with the price mechanism in terms of resource allocation for the poor and the rich?
The problem with the price mechanism is that it can provide “too many wasted resources” to the rich and “too few necessary resources” to the poor, due to price exclusion. This can result in an overconsumption of goods and services by the rich and an underconsumption of goods and services by the poor, leading to a misallocation of resources, allocative inefficiency, and market failure.
What are some examples of staple, necessity items that the poor may not be able to access due to price exclusion?
Some examples of staple, necessity items that the poor may not be able to access due to price exclusion are education, healthcare, public transport, food, clothing, and water.
What is income inequality, and how can it cause market failure?
Income inequality refers to the unequal distribution of income among the population. Income inequality can cause market failure because it can result in an overconsumption of goods and services by the rich and an underconsumption of goods and services by the poor, leading to a misallocation of resources, allocative inefficiency, and market failure. The level of income inequality deemed too high is based on equity (fairness) and differs from one government to the next, making it a normative consideration.
