Ch.16 - Inequality

Question 1

What is the Lorenz curve?

Answer 1

the relationship between the cumulative percentage of households and the cumulative percentage of income.

• it shows the degree of inequality in a country

Question 2

Gini coeffiecient

Answer 2

a measure of the degree of inequality of income in a country.
- measures how far the Lorenz curve is from the perfectly equal income distribution

Question 3

What does the Gini coefficient tell us?

Answer 3

it allows us to observe different inncome distributions
- it doesnt tell us about HOW icnome is distributed, but that one country has more inequal distribution than another.

Question 4

what does a higher Gini coeffiecient mean?

Answer 4

Gini coefficient is a number between o and 1
–> 0 = income equality is perfect
–> the higher the Gini coefficient the greater the degree of income inequality

Question 5

What are problems in measuring inequality?

Answer 5

① The Economic Life cycle - The regular pattern of income variation over a person’s life is called the life cycle.

② Transitory versus permanent income
- Incomes vary because of random and transitory forces.
- Acts of nature.
- Temporary layoffs due to illness or economic conditions, etc.
- A family’s ability to buy goods and services depends largely on its permanent income, which is its ‘normal’, or average, income.

③ Economic Mobility = the movement of people among income classes.

Question 6

Poverty rate def

Answer 6

the percentage of the population whose family income falls below an absolute level called the poverty line.

Question 7

Poverty line def

Answer 7

an absolute level of income set by the government below which a family is deemed to be in poverty.

• In the UK and Europe this is measured by earnings less than 60 per cent of median income.

Question 8

Absolute poverty def

Answer 8

a level of poverty where an individual does not have access to the basics of life – food, clothing and shelter.

Question 9

Relative poverty def

Answer 9

where an individual is not able to access what would be considered acceptable standards of living in society

Question 10

What are some of the leading philosophies about the role of government in altering the distribution of income?

Answer 10

1. utilitarianism
2. liberalism
3. libertaranism
4. liberal paternalism

Question 11

What does utilitarianism say about govt and redistributing income?

Answer 11

the government should choose policies to maximize the total utility of everyone in society

• this case is based n the assumption of diminishing marginal utility
• don’t believe all incomes should be equal

Question 12

Who founded utilitarianism?

Answer 12

English philosophers: Jeremy Bentham and John Stuart Mill

Question 13

What does liberalism say about govt and redistributing income?

Answer 13

government should choose policies deemed to be just, as evaluated by an impartial observer behind a “veil of ignorance.”

• Public policy should be based on the maximin criterion, which seeks to maximize the utility or well-being of the worst-off person in society.

Question 14

What is the maximin criterion?

Answer 14

seeks to maximize the utility or well-being of the worst-off person in society.

Question 15

Who developed Liberalism?

Answer 15

John Rawls

Question 16

What does libertarianism say about govt and redistributing income?

Answer 16

the government should punish crimes and enforce voluntary agreements but should not redistribute income.

• there should be equality of opportunity - those who are more productive should be rewarded with higher incomes; otherwise if govt intervenes in distribution of income, there’ll be a misalignment of incentives - those working hard will be disintenvised bc they will get lower income

Question 17

What does libertarian paternalism say about govt and redistributing income?

Answer 17

recognizes that people should be free to choose but that government has a legitimate role in trying to influence people’s behaviour in order to make their lives better

‘Nudges’ are used by ‘choice architects’ such as governments to influence people’s choices and so improve their own and society’s welfare.

Question 18

what are some policies to reduce poverty?

Answer 18

1. Minimum wage laws. - The magnitude of the effects of the minimum wage depends on the price elasticity of the demand for labour.
2. Social Security. government benefits that supplements the incomes of the needy
3. Negative income tax. - collects tax revenue from high income households and gives transfers to low-income households.
4. In-kind transfers. - transfers to the poor given in the form of goods and services rather than cash.