AOS 2 - Economic Efficiency and Equity Flashcards
Equity vs Equality in the distribution of income
Equality is treating everyone the same (evenness) whereas equity is giving everyone what they need to be successful (fairness). In regards to the distribution of income equity is achieved through progressive taxation that is redirected from higher income earners to lower income earners.
Income: earned/unearned income, transfer income, gross income, disposable income, nominal/real income and social wage income *factor income
Earned: represents a reward to individuals for their direct or physical contribution to the production process. Eg wages in return for labour
Unearned: represents a reward for providing resources other than labour. In other words it represents a reward for indirect contribution to production. Eg dividends, interest, rent
Transfer: is income transferred from one source to another. Eg taxes transferred to welfare
Gross: private or market income in addition to the direct cash benefits received from governments
Disposable: the total income that households have received in exchange for their participation in the production process after tax
Nominal: is the value of income that is received by an entity in actual dollar terms
Real: is the value of income received after taking into account the effects of inflation
Social wage: this is disposable income plus indirect government benefits provided in the form of g+s such as public housing, education, health and welfare
Factor: is the total return to factors of production for the contribution to production
Measures of income inequality and poverty such as the Lorenz curve, Gini coefficient and Henderson poverty lines
Lorenz Curve: plots the cumulative % share of total income by each quintile (each quintile accounts for 20% of the household population)
Gini Coefficient: is a number between 0-1 measuring the degree of inequality in the distribution of income. The closer the number is to 1 the greater the inequality
Henderson poverty line: a benchmark level of income for various household sizes, below which, a household is considered to be living in relative poverty
Absolute poverty Vs Relative poverty
Absolute: refers to the inability to purchase basic g+s such as food, shelter and clothing due to insufficient income
Relative: refers to the inability to live with a dignified standard of living compared to a generally agreed standard, this may be due to lower than average income
Causes of income inequality and poverty in Australia and one other nation such as unequal ownership of factors of production, relative levels of labour demand/supply, unemployment, lack of human capital and sovereign indebtedness
Unequal ownership of factors of production: the high level of income earned by a relatively small proportion of households creates further inequality. This is because the high household income levels can be invested in assets that grow over the long term
Relative levels of labour demand/supply: supply low relative to demand= high wages, supply high relative to demand= low wages
Unemployment: refers to the number of people who are actively seeking a job but are not in paid employment. Unemployment can be frictional, long-term, structural, hard-core or hidden.
Lack of quality of human capital: vastly different pay levels received by income earners due to differences in skill, talents and abilities
Sovereign indebtedness: the debt incurred by governments when their spending exceeds their revenue, resulting in a budget deficit that requires financing, some of which usually comes form other countries
Effect of poverty on material/non-material living standards
Non-material: helplessness/despair/mental illness, development of class system, social unrest or anti-social behaviour, loss of social mobility, inequality of opportunity and intergenerational poverty cycle
Material: are negatively affected as there is a lack of financial means to support health and education
Economic efficiency and the benefits of allocative and technical efficiency
Productive (technical): is defined as that situation where a nations resources are producing the maximum amount of outputs at the lowest cost and highest productivity. Benefits include increases international competitiveness, AD/economic growth, employment, material living standards
Allocative: this is where a nation allocates its resources in a way that creates the best possible combination of g+s for consumers and the nation. Benefits include consumer/society satisfaction, reduces resource wastage
Economic and social costs/benefits of achieving equity in the distribution of income
Economic benefits: reduced cost to the government, increased consumption, increased customer satisfaction
Economic costs: reduced quality of the nations human capital & stock, labour/capital productivity, increased cost of production > inflation > decreased international competitiveness & economic growth > unemployment
Social benefits: prevents helplessness/despair, mental illness, social unrest, class system, conspicuous consumption, wealth inequality, inequality of opportunity
Social costs: decreased motivation for society to work harder, take risks or undertake education as the monetary incentive is reduced
Compatibility/conflict between the goals of equity in the distribution of income and efficiency of resources allocation
Conflict:
+equity>-motivation by producers>-efficiency
-equity>+motivation by producers>+efficiency
Compatibility:
+efficiency>+entrepreneurial risk>+employment opportunities
+equity>+allocation of resources
The role of markets in the achievement of equity in the distribution of income and the efficiency of resource allocation
Markets + Efficiency: markets allocate resources toward the production of products that attract the most profit. Market failures can often result as resources are allocated to more profitable g+s such as de-merit goods (drugs, tobacco) rather than merit goods (public service). Therefore resources are allocated to areas that are more profitable for the entrepreneur not necessarily more desirable thus decreasing allocative efficiency for society. Increased productive efficiency>decreased cost of production>decreased prices>increased competitiveness.
Market + Equity: in an unregulated market producers attempt to maximise production and efficiency, however this can result in an undesirable outcome for society eg market failures. Laws that exist in an effort to restrict these market failures include OHS, equal opportunity/anti-discrimination laws, laws against misleading/deceptive conduct, environmental laws.
Budgetary policy decisions on the achievement of equity in the distribution of income and the efficient allocation of resources, such as progressive, proportional and regressive taxes, unemployment benefits and subsidisation
Progressive: collects proportionally more from higher income earners compared to lower income earners. It involves the rate of tax increasing as income increases.
Proportional: collects proportionally identical amounts for all income earners. It involves the rate of tax remaining the same for all taxpayers.
Regressive: collects proportionally more of lower income earners income compared to a higher income earners income. It involves the rate of tax decreasing as income increases.
Unemployment benefits: governments provide lower income groups with direct transfer income that enable them to purchase g+s, particularly the basics of food, clothing, shelter.
Subsidisation: the government provides a number of non-cash benefits that target low income households and provide them with a greater capacity to use existing income to purchase basic g+s. Eg public housing/transport/health, energy rebates and concessions
