1. Unit 5 – Market Failure and the Role of Government Income Inequality: The Lorenz Curve, The Gini Coefficient, Taxation

2. Essential Questions 1.How do we measure income inequality? 2.How do we demonstrate income inequality graphically? 3.Should the government do anything to address income inequality? If so, what?

3. Percentage of Income Percentage of Families 0 20 40 60 80 100 The Lorenz Curve Income Distribution Quintile% of Total Income Lowest 20%4.2 Second 20%9.7 Third 20%15.4 Fourth 20%22.9 Highest 20%47.7 20 40 60 80 100

4. Percentage of Income Percentage of Families 0 20 40 60 80 100 The Lorenz Curve Income Distribution Quintile% of Total Income Lowest 20%4.2 Second 20%9.7 Third 20%15.4 Fourth 20%22.9 Highest 20%47.7 Lowest 20%1 Second 20%3 Third 20%5 Fourth 20%11 Highest 20%80 20 40 60 80 100

5. Percentage of Income Percentage of Families 0 20 40 60 80 100 The Gini Coefficient = Area between the curves ÷ Total Area under diagonal line 20 40 60 80 100 0 = Total Equality 1 = Total Inequality

6. Inequality and Government Redistribution – How can the government decrease inequality? 1.Progressive Income Taxes – Tax rates increase as income rises. Federal income tax works like this. 2.Estate and Gift Taxes – Taxes are taken when money is inherited or given between family members. 3.Government Transfers – Cash transfer payments like Social Security and unemployment payments. Non-cash transfers like Medicaid and food stamps.