Redistribution of income and wealth SBC Economics Redistribution of income and wealth Learning outcome AA Explain the problem of unequal distribution of income Differentiate between absolute and relative poverty Describe the difference between income and wealth Evaluate the different policies to redistribute income Explain the trickle down effect Reading: Unit 69

Redistribution of income and wealth The free market is likely to lead to a situation where income and wealth are not distributed evenly amongst the population This inequitable distribution of income and wealth can be described as market failure

Why is the uneven distribution of income and wealth a problem? Absolute poverty Absolute poverty exists when an individual does not have the resources to be able to live i.e. food, water, clothing, shelter, basic health care etc. In extreme cases some members of society may die from being in absolute poverty, this is clearly inequitable

Why is the uneven distribution of income and wealth a problem? Relative poverty Relative poverty exists when people are living far below average living standards existing in their country or area If the gap between the rich and poor (those in relative poverty) is too great it creates social problems

Why is the uneven distribution of income and wealth a problem? Lack of horizontal equity When people at the same level in society are not treated equally Example: women being paid less than men for doing the same job Example: discrimination against people from different races This lack of equity may create social problems

Why may the uneven distribution of income and wealth be a good thing? Economic efficiency The differences in income levels may motivate people to work harder or get a higher level of education The competition creates a greater level of efficiency in the economy

Measuring the distribution of income in an economy We can plot the % of income against the % of households in an economy This gives us a picture of the level of equality that exists in terms of income distribution The diagram is known as the Lorenz curve

Measuring the distribution of income in an economy Imagine that everyone in society had the same level of income i.e. Bottom 20% Next 20% Middle 20% Top 20% % of income 20

Lorenz curve

Measuring the distribution of income in an economy If income is not distributed evenly then the Lorenz would not be a 45° line i.e. Bottom 20% Next 20% Middle 20% Top 20% % of income 8 12 16 24 40

Lorenz curve

Measuring the distribution of income in an economy The further the Lorenz curve is from the 45° line the greater the level of income inequality