Ch. 79 Equality And Equity

Question 1

Describe the Lorenz curve?

Answer 1

Y axis - percentage of income (cumulative)
X axis - percent of households (cumulative)

A straight line going through the origin shows complete equality. The further a line goes away from the line of complete equality, the greater the inequality in the economy.

Question 2

What is the equation for the Gini coefficient and explain values for one and zero?

Answer 2

Area between 45° line and the Lorenz curve / total area of triangle

GC = 1 then all income is owned by one person

GC = 0 all income is equally divided

Question 3

What is the Gini index?

Answer 3

100 x GC

Question 4

Define absolute poverty?

Answer 4

Absolute poverty exists when individuals do not have the resources to be able to consume sufficient necessities to survive.

Question 5

Define relative poverty?

Answer 5

Poverty which is defined relative to existing living standards for the average individual.

Question 6

Causes of poverty? (7)

Answer 6

LIL HUID
Lack of human capital
Inheritance (‘cycle of poverty’ - born into poor country, likely to grow up to be poor)
Lack of financial capital (old people without enough savings)

Health problems (means people can’t work)
Unemployment (no income leads to poverty)
Infrastructure (no hospitals/schools/roads makes it hard to earn income)
Dependence on others for income (children often in poverty, those dependent on benefits tend to be poor)

Question 7

Define horizontal equity?

Answer 7

The identical treatment of identical individuals or groups in society and identical situations.

Question 8

Define vertical equity?

Answer 8

The different treatment of individuals or groups which are to similar in characteristics.

Question 9

Equity vs efficiency?

Answer 9

Free market forces lead to high efficiency but bad distribution of income.

Therefore the government intervenes which causes distortion in the market leading to allocative inefficiency but better income distribution.

Question 10

What is the theory of the second best?

Answer 10

• Shows that actually (due to the fact that in practice there are no pure free market economies) another distortion such as welfare payments may lead to greater economic efficiency.
• Also shows that it is most effective if these distortions are distributed thinly across many areas rather than concentrated on one.

Question 11

Six causes of inequality in income?

Answer 11

PHUGED

• Physical and financial wealth (those with assets will be able to generate more income)
• Household composition (number of earners compared to number they have to support)
• Unemployment and retirement
• Government policy (how much redist.)
• Earned income
• Degree of competition in product markets (imperfect competition leads to overpricing and therefore underconsumption)