Income and Wealth Inequality

Question 1

Income and Wealth Inequality

Answer 1

The unequal distribution of income and wealth within an economy.

Question 2

Income and Wealth Inequality- Benefits- Drawbacks

Answer 2

Benefits:

• Trickle down effect (jobs, tax and multiplier)
• Incentive to find work (-welfare) and work hard (i.e.+productivity = +RNO)
• Incentives entrepreneurship i.e.risk taking

Drawbacks:

• Diminishing marginal utility of income: less inequality = net gain
• Social, health and human capital costs (e.g.-literacy rates, crime, depression and protests = expensive)
• Lower AD (higher income households have +MPS)
• +wealfare = budget deficit
• Trickle down effect may not occur: high earners have high MPS, may send abroad, tax avoidance (laffer curve).
• Inherited wealth = lower participation rate

Question 3

Causes of income and wealth inequality

Answer 3

• Inheritance
• Marriage
• Education and training / human capital
• Unemployment
• Age (older = more wealth)

Question 4

Income and Wealth Inequality

• Government Intervention
• Government Failure

Answer 4

National minimum wage

• real wage unemployment, EV: wage efficiency theory, set above equilibrium, level

National maximum wage

• reduce AD
• brain drain * less incentive to work hard and take risks (-productivity and -entrepreneurs)

Increase welfare benefits

• budget deficit
• less incentive to work
• poverty trap (universal credit: gradually decreases as more hours worked)
• universal benefits (available to everyone in a group) don’t take income into account

Progressive tax

• less incentive to earn higher wages = -productivity
• Laffer curve (tax avoidance and brain drain)

Inheritance tax

Direct provision of goods or services (e.g. healthcare and education)

• Opportunity cost
• Crowding out

Question 5

Horizontal Equity (e.g. tax…)Vertical Equilty (e.g. tax…)

Answer 5

The identical treatment of identical individuals, e.g. same income earners taxed the same.The unequal treatment of unequals, e.g. progressive tax.

Question 6

Sources of income

Sources of wealth

Answer 6

Income:

• Wages
• Interest
• Rent
• Dividends

Wealth:

• Inheritance
• Gifts
• Accumulated earned income