1. 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

2. Redistribution of income and wealth
Government can take an active role in creating a more equitable distribution of income and wealth in an economy
Government can achieve this through:
Government expenditure
Taxation
Legislation

3. Redistribution of income and wealth
Government expenditure
Government can provide direct monetary benefits to those in need i.e. unemployment benefits (Job Seekers Allowance)
Government can target spending on specific areas i.e. food and clothing for children from poor families
Government can provide goods and services that are of benefit to society i.e. health care, education etc.

4. Redistribution of income and wealth
Taxation
Taxes can be progressive, regressive or proportional
If the government adopts a progressive tax system there will be a more even distribution of income and wealth in society
If the government adopts a regressive tax system there will be a less even distribution of income and wealth in society

5. Redistribution of income and wealth
Legislation
Government can create laws to ensure certain pay levels i.e. set minimum wage
Government can create laws to ensure equitable pay for different groups of society i.e. equal pay for men and women
Government can create laws to force firms to provide certain benefits for their employees i.e. health insurance, pension contributions etc.

6. Give examples of government policies that create a more even distribution of income and wealth

7. Costs of redistribution of income and wealth
Taxes mean that individuals lose the freedom to choose how they spend some of their income
Some economists argue that people rather than the government are in a better position to choose how they spend their own money
This is based on the idea that the free market creates an efficient allocation of resources and government intervention interferes with this

8. Costs of redistribution of income and wealth
Higher taxation creates a disincentive to work
If people choose not to work then it creates unemployment which will lead to a decrease in National output

9. Costs of redistribution of income and wealth
Minimum wages and other forms of government intervention increase the costs of firms
Higher costs mean that firms may employ fewer staff which creates unemployment and leads to a decrease in National output

10. Costs of redistribution of income and wealth
Higher taxes are a disincentive to investment
Domestic firms may invest less and foreign firms may choose to invest in other countries
High taxes may lead to a flight of labour from the economy
This means that highly skilled people may choose to seek jobs in other countries to avoid the high tax levels in their own country

11. Trickle-down effect
Trickle-down effect is the idea that the income and wealth of the richer members of society will move downwards to the poorer members of society
Example: Rich people eat in an expensive restaurant. They pay the restaurant owner who in turn pays their cooks, waiters etc. They also pay the people who deliver the food who buy from the farmers and so on ………