Equity

Question 1

what is equity and how does it differ from efficiency

Answer 1

how society’s production or income (economic pie) is divided up amongst the population equally
efficiency is increasing the size of the economic pie

Question 2

what is the price of water (bottled an tap) and the average income spent on water (low and middle class)

Answer 2

TAP - 30c per litre
BOTTLE - $3 per litre
average income - 1% budget on water bill
low income - 4% (4x as much) budget on water bill

Question 3

how would a water shortage be reflected in a normal market

Answer 3

demand would increase and supply decreases
price would rise to reflect scarcity, consumers would consumer less and producers would have the incentive to supply more

Question 4

the aus gov keeps water price under equilibrium for equity reasons (scarcity) explain how this is inefficient

Answer 4

restrictions are inefficient because they create shortage and DWL
increasing price would increase efficiency but decrease equity

Question 5

what is vertical equity and what is the limit

Answer 5

redistribution of wealth from rich through tax/welfare to the poor (robin hood approach)
the limit = it will impact the incentive to work if tax rate is too high

Question 6

explain how vertical equity en-captures the efficiency/equity trade off

Answer 6

redistributing income tries to give everyone an equal size of economic pie BUT may cause the pie to shrink
SO:
increasing pie divided unequally OR small pie divided equally

Question 7

what is horizontal equity

Answer 7

those who earn the same income should pay the same tax

everyone is equal and tax is based solely on income

Question 8

what is personal income tax ins aus

Answer 8

designed to improve vertical equity to destribute income

alleviates poverty and provides people with minimum standard of living