government policies to reduce poverty and inequality Flashcards
what are policies there to do in reducing poverty and inequality
Policies used to alleviate poverty include promoting economic growth, improving education, providing more generous state benefits, progressive taxation, and the establishment/increase of a national minimum wage
how would this policy improve poverty and equity : Reducing the use of protectionist policies
Removing protectionism or engaging in expansionary demand and supply-side policies will promote growth
Often in less developed countries, economic growth is linked to one industry and generates many negative externalities of production, possibly resulting in decreased living standards
Results in :
higher growth - higher wages - better education/healthcare - Bette human capital - better productivity - higher income
how would education policy improve poverty and equity?
investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)
results in
Higher education/skill levels → higher human capital → increased productivity → higher output → higher income
state benefits policy how would it help poverty?
State benefits are usually given to the poorest and most vulnerable people in society
State benefits include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc.
Results in :
More benefits → higher wages → better education/healthcare → better human capital → better productivity → higher wages
what would progressive tax do to improve poverty?
A progressive tax system is one that applies higher levels of income tax to higher levels of income i.e lower income earners pay a lower tax rate than higher income earners
Tax revenue collected is then redistributed to those who need it most
Redistribution often starts with the provision of free education and healthcare
Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes
Results in:
Higher redistribution → better education/healthcare → better human capital → better productivity → higher income
how will minimum wage improve poverty ?
National minimum wages are set above the free market rate
Firms are not allowed to pay anyone less than the legal rate
This raises the level of income in poorer households
Results in:
Higher wages → better education/healthcare → better human capital → better productivity → higher wages
what do free market economists argue with the government intervention in the free market?
creates inefficiencies and reduces incentives
what does reducing poverty and inequality have good/bad consequences on?
employment economic growth
gov finances
Economic consequences of policies - employment
Employment may increase as there is an incentive for households to increase the supply of labour if minimum wages increase
On the other hand, employment levels may fall as progressive taxes increase and there is a disincentive to work
Firms may also demand less labour if the cost of hiring increases
Economic consequences of policies - economic growth
Higher levels of income may promote spending and increase economic growth
However, higher taxes increase production costs and may cause firms to leave the country in favour of a lower tax system
This causes output to fall and may lower economic growth
Economic consequences of policies - government finances
Increased taxes can lead to to an increase in government revenue
It can also lead to fiscal drag, where increased revenue is actually outpaced by a rise in government spending, particularly on social welfare payments and education
This causes negative effects for future generations if money needs to be borrowed to fund policies
