Poverty And Inequality Flashcards
What is difference between income and wealth?
Income is the flow of money received over a period of time, typically from wages, salaries, investments, or government transfers.
Wealth refers to the stock of assets owned by an individual or household at a particular point in time, such as property, savings, stocks, and other valuables.
Income contributes to wealth accumulation, but wealth can also generate income (e.g., rental income from property, dividends from stocks).
What factors influencing the distribution of income wealth?
- Education and Skills – Higher levels of education and skills generally lead to higher-paying jobs.
- Employment and Occupation – Differences in job types, sectors, and experience levels affect income distribution.
- Government Policies – Taxation, welfare benefits, minimum wage laws, and regulations impact both income and wealth inequality.
- Inheritance and Wealth Transfers – Wealth is often passed down through generations, increasing inequality.
- Market Forces – Demand and supply of labor influence wage levels, with some professions earning significantly more than others.
- Globalization and Technology – Automation and outsourcing can lead to job losses in some sectors while increasing incomes in others.
- Discrimination – Gender, racial, or regional disparities can lead to unequal income and wealth distribution.
- Capital Gains and Investments – Those who own assets (property, shares, businesses) often see faster wealth growth than those reliant on wages alone.
What is difference between equality and equity in relation to the income and wealth?
Equality means everyone receives the same amount of income or wealth, regardless of their circumstances.
Equity focuses on fairness, meaning individuals receive resources or opportunities based on their needs and contributions.
Example:
Equality: Everyone gets the same government pension.
Equity: Those with lower lifetime earnings receive a higher pension relative to their income to ensure a basic standard of living.
What is the Lorenz curve?
The Lorenz Curve is a graphical representation of income or wealth distribution within a population. It plots the cumulative percentage of total income (or wealth) against the cumulative percentage of the population, ranked from poorest to richest.
Uses:
Helps compare income distribution across countries or over time.
Used in policy-making to assess the impact of taxation and welfare systems.
Limitation:
Does not show the absolute level of income (a low Gini coefficient could still mean widespread poverty).
May not capture the full complexity of inequality (e.g., differences in social mobility or wealth accumulation).
What is Gini coefficient?
The Gini Coefficient is a numerical measure of income or wealth inequality derived from the Lorenz Curve. G = A/ A+B
- A is the area between the line of equality and the Lorenz Curve
- B is the area below the Lorenz Curve
- 0 (perfect equality): Everyone has the same income/wealth.
- 1 (perfect inequality): One person has all the income/wealth, while everyone else has none.
- Most countries have Gini coefficients between 0.25 and 0.65, with higher values indicating greater inequality.
What the likely benefits of more equal distribution of income and wealth?
- Reduced Poverty and Improved Living Standards – Lower income disparities can ensure a basic standard of living for all, reducing absolute poverty.
- Greater Social Cohesion and Stability – Less inequality reduces social tensions, crime rates, and political unrest.
- Higher Aggregate Demand – A more equal income distribution can boost consumption, as lower-income households tend to have a higher marginal propensity to consume (MPC).
- Better Access to Education and Healthcare – Reducing wealth gaps can improve access to essential services, leading to a healthier, more productive workforce.
- Fairer Economic Opportunities – Ensures that talent and effort, rather than inherited wealth, determine economic success.
What the likely costs of more equal distribution of income and wealth?
- Lower Incentives to Work and Innovate – High taxes and redistribution policies may reduce incentives for individuals to work harder, invest, or innovate.
- Government Inefficiency – Redistribution policies, such as welfare programs, may lead to inefficiencies, bureaucracy, and unintended disincentives.
- Reduced Investment and Economic Growth – If taxes on high earners are too high, capital flight or reduced investment in businesses may occur.
- Difficulty in Measuring ‘Fairness’ – Perfect equality does not account for differences in effort, skill, or contribution to the economy.
What the likely benefits of more unequal distribution of income and wealth?
- Incentives for Hard Work and Innovation – The prospect of earning higher incomes can motivate individuals to invest in education, take risks, and innovate.
- Efficient Allocation of Resources – In a free market, income distribution is based on productivity and contribution, potentially leading to efficient outcomes.
- Higher Savings and Investment – Wealthier individuals have higher savings rates, which can fund business expansion and economic growth.
- Encourages Entrepreneurship – Individuals may be more willing to take risks if there is the potential for significant financial reward.
What the likely costs of more unequal distribution of income and wealth?
- Increased Poverty and Social Unrest – High inequality can lead to higher crime rates, political instability, and greater public dissatisfaction.
- Lower Economic Mobility – When wealth is highly concentrated, it becomes harder for low-income individuals to move up the economic ladder.
- Underutilization of Human Capital – If access to education and opportunities is limited to the wealthy, talented individuals from lower-income backgrounds may not reach their full potential.
- Lower Aggregate Demand – Extreme inequality may lead to lower overall consumption, as the wealthy save more and spend proportionally less than lower-income households.
- Market Failures and Political Power Concentration – The rich may use their wealth to influence politics and policies in their favor, reinforcing inequality.
How does excessive inequality as a cause of market failure?
- Underconsumption and Demand Deficiency – If too much wealth is concentrated in the hands of a few, lower-income households may lack sufficient purchasing power, leading to lower aggregate demand and economic stagnation.
- Reduced Social Mobility – High inequality may prevent lower-income individuals from accessing quality education, healthcare, and job opportunities, reducing economic efficiency.
- Negative Externalities – High inequality can lead to increased crime, poor health outcomes, and social unrest, imposing costs on society.
- Monopoly and Market Power – Wealthy individuals and firms may use their financial power to dominate markets, reducing competition and leading to inefficient resource allocation.
- Political and Institutional Distortions – Excessive inequality may allow the wealthy to exert disproportionate influence over policy-making, resulting in policies that protect their interests rather than promoting overall economic welfare.
How does excessive inequality as a consequence of market failure?
- Labour Market Failures – Discrimination, unequal access to education, and information asymmetry can lead to wage disparities and income inequality.
- Capital Market Failures – Unequal access to credit can prevent low-income individuals from investing in education, entrepreneurship, or homeownership, reinforcing wealth inequality.
- Public Goods Underprovision – When markets fail to provide adequate public services (e.g., education, healthcare, infrastructure), the poor suffer disproportionately, widening inequality.
- Globalisation and Technological Change – Free markets may reward high-skilled workers while leaving low-skilled workers behind, increasing income disparities.
While the economic effects of inequality can be analyzed objectively, the question of what constitutes a “fair” or “equitable” distribution of income and wealth is subjective.
- Free-market advocates argue that inequality is natural and necessary to reward effort, skill, and innovation.
- Social democrats believe in redistributive policies to ensure equal opportunities and reduce extreme disparities.
- Marxist perspectives see inequality as a systemic failure that needs structural economic change.
These differing views influence government policy choices, such as:
- Progressive taxation (higher taxes on the rich to fund welfare programs).
- Minimum wage laws to ensure fair pay.
- Public spending on education and healthcare to improve economic mobility.
- Regulation of monopolies to prevent wealth concentration
What is the difference between relative and absolute poverty?
Absolute Poverty:
Defined as the inability to afford basic necessities such as food, clean water, shelter, and healthcare.
Measured using a fixed threshold, such as the World Bank’s $2.15 per day (2022) international poverty line.
Example: A person who lacks access to clean drinking water and sufficient food is in absolute poverty.
Relative Poverty:
Defined in relation to the median income of a society. Individuals are in relative poverty if they cannot afford the standard of living that is considered normal in their country.
Measured as a percentage of median income (e.g., in the UK, those earning less than 60% of the median income are considered relatively poor).
Example: A household in the UK unable to afford heating, internet access, or school trips for children may be in relative poverty, even if they can afford basic food and shelter.
What are likely causes of poverty?
- Low Income and Unemployment:
Insufficient earnings prevent individuals from meeting basic needs.
Structural unemployment, technological changes, and globalization can increase poverty. - Lack of Education and Skills:
Low-skilled workers earn lower wages and have fewer job opportunities.
Poor education perpetuates intergenerational poverty. - Health Issues and Disability:
Poor health reduces the ability to work, leading to loss of income.
High medical costs can push families into poverty. - High Living Costs and Inflation:
Rising prices for essential goods and services reduce purchasing power.
Housing affordability issues contribute to homelessness and financial hardship. - Economic Inequality and Market Failures:
Wealth concentration and monopolies limit economic mobility.
Discriminatory labor markets can lead to wage gaps for marginalized groups. - Government Policy and Welfare Gaps:
Weak social safety nets leave vulnerable individuals without support.
Tax systems and minimum wage policies influence income distribution. - External Shocks and Crises:
Natural disasters, wars, and pandemics disrupt livelihoods and economic stability.
Economic recessions can lead to widespread job losses.
What are the likely effects of poverty?
- Poor Health Outcomes:
Malnutrition, higher disease rates, and lower life expectancy.
Increased mental health issues due to financial stress. - Lower Educational Attainment:
Children in poverty struggle to access quality education, reducing future earning potential.
Higher dropout rates due to financial pressure to work. - Crime and Social Unrest:
Higher poverty rates correlate with increased crime and political instability.
Social unrest can discourage investment and economic growth. - Reduced Economic Growth and Productivity:
Poverty limits the development of human capital and workforce productivity.
Lower consumer spending reduces aggregate demand. - Intergenerational Poverty:
Poverty is often passed down through generations, making it harder to escape.
Limited access to education and healthcare perpetuates income inequality.
What policies are available to influence the distribution of income and wealth and to alleviate poverty?
- Redistributive Fiscal Policies
(a) Progressive Taxation
Higher income earners pay a larger percentage of their income in taxes.
Examples: UK’s progressive income tax system, inheritance tax, capital gains tax.
Economic Consequences:
Reduces income inequality.
May discourage work and investment if tax rates are too high.
Generates revenue for social programs.
(b) Transfer Payments (Welfare Benefits & Subsidies)
Direct cash payments to low-income individuals (e.g., Universal Credit in the UK, unemployment benefits).
Subsidies for essential goods (e.g., food stamps, housing support).
Economic Consequences:
Reduces absolute poverty and improves living standards.
Increases government spending, which may lead to higher taxes or borrowing.
If poorly designed, may create disincentives to work (poverty trap).
What policies are available to influence the distribution of income and wealth?
- Labour Market Policies
(a) Minimum Wage Legislation
A legal wage floor to ensure workers receive fair compensation (e.g., UK’s National Minimum Wage).
Economic Consequences:
Increases income for low-paid workers, reducing wage inequality.
May lead to job losses if firms cannot afford higher wages.
Can cause inflation as firms pass costs to consumers.
(b) Trade Union Support & Worker Protections
Strengthening worker rights, collective bargaining, and improving job security.
Economic Consequences:
Reduces exploitation and increases wages.
May lead to lower business profitability and job losses if wage demands are too high.
(c) Policies to Reduce Labour Market Discrimination
Anti-discrimination laws ensure equal pay and opportunities for all workers.
Economic Consequences:
Improves economic efficiency by fully utilizing talent.
May increase regulatory burdens on businesses.
What policies are available to influence the distribution of income and wealth?
- Public Services Provision
(a) Free or Subsidized Education
Expanding access to quality education, especially for low-income families.
Economic Consequences:
Improves social mobility and reduces long-term inequality.
Requires high government spending, which may increase taxes.
Long-term benefits may take years to materialize.
(b) Universal Healthcare & Social Care
Publicly funded healthcare systems (e.g., NHS in the UK) provide medical services to all.
Economic Consequences:
Reduces health inequalities and improves workforce productivity.
Large financial burden on government budgets.
Potential inefficiencies in state-run healthcare services.
(c) Housing and Social Infrastructure Investment
Building affordable housing and improving public transport.
Economic Consequences:
Reduces homelessness and improves living standards.
Requires significant public funding, increasing national debt if not managed well.
What other policies are available to influence the distribution of income and wealth?
Other Market-Based Policies
(a) Encouraging Entrepreneurship & SMEs
Government grants, low-interest loans, and tax breaks for startups.
Economic Consequences:
Encourages job creation and economic mobility.
May not benefit the poorest if barriers to entrepreneurship remain high.
(b) Negative Income Tax (Universal Basic Income – UBI)
UBI provides a fixed income to all citizens, reducing extreme poverty.
Economic Consequences:
Reduces inequality and guarantees a minimum standard of living.
High costs may make it fiscally unsustainable.
May reduce work incentives for some individuals.
