7 The distribution of income and wealth: poverty and inequality (MICRO)

Question 1

Give 4 different types of policies that could be used to alleviate poverty and income inequality

Answer 1

• do nothing / cut tax
• increase direct tax and welfare payments
• impose/increase national minimum wage
• raise tax free income threshold
• invest in education and training

Question 2

Explain how lowering taxes could alleviate poverty and income inequality

Answer 2

• encourages greater investment and consumption
• leads to the multiplier effect and provides greater jobs for low income households

Question 3

Analyse how doing nothing could alleviate poverty and income inequality

Answer 3

incentivises people to enter the workforce by reducing the opportunity cost of losing benefits and leisure time

Question 4

Referring to allocative efficiency, explain why doing nothing may not be a good policy to alleviate poverty and income inequality

Answer 4

• some argue JSA is necessary to support people while they look for work more suited to their skills
• this causes more allocative efficiency rather than jumping into the first job available

Question 5

What is your 2 points of conclusion/evaluation for the policy of doing nothing / cutting taxes?

Answer 5

• at least provide sufficient welfare to cover the basic needs and provide education and healthcare to give people the same opportunities
• perhaps make it a little more difficult to claim JSA instead - ex: must provide evidence you are in training or applying for jobs

Question 6

Analyse how increased direct tax and increased welfare payments can alleviate poverty and income inequality

Answer 6

• people on higher wages derive less utility from the money you tax so more utility is gained overall
• lower income households have a higher mpc so this will stimulate demand
• meets basic needs of all people in society

Question 7

What is the main problem with increased direct tax?

Answer 7

• poverty trap - opportunity cost of losing benefits and leisure time outweighs wage gained from entering work
• tax disincentivises investment and people aspiring for higher paid roles

Question 8

Define income

Answer 8

a flow of money, usually received in payment for factors of production, and is recorded for an individual or household over a given period of time

Question 9

Define wealth

Answer 9

a store of money of value which is measured at a particular moment in time

Question 10

Define inequality

Answer 10

individuals, households or communities having a disproportionate amount of wealth and income

Question 11

Define inequity

Answer 11

where individuals, households or communities are treated unfairly/unjustly in some way

Question 12

Briefly describe an egalitarian’s view

Answer 12

everyone should have equal opportunities so we should redistribute wealth

Question 13

Briefly describe a libertarian’s view

Answer 13

people have the right to the fruits of their labour and it shouldn’t be taken

Question 14

What does the Lorenz curve show?

Answer 14

an economy’s relationship between cumulative income distribution and cumulative population distribution

Question 15

Describe, in words, how the Gini coefficient is calculated

Answer 15

by dividing the area between the line of perfect equality and the Lorenz curve for a country by the total area under the line of perfect equality

Question 16

If there was a perfectly equal income distribution in an economy, what would be the value of the Gini coefficient?

Answer 16

0

Question 17

If one individual had 100% of a country’s wealth, what would be the value of the Gini coefficient?

Answer 17

1

Question 18

What is a drawback of the Gini coefficient, what doesn’t it show?

Answer 18

it doesn’t show the distribution for certain groups and regions

Question 19

What is the Gini coefficient of the UK?

Answer 19

0.34 or 34%

Question 20

What is the Gini coefficient of Brazil?

Answer 20

0.55 or 55%

Question 21

Both income and wealth are mutually…

Answer 21

mutually reinforcing

Question 22

List 4 factors that could lead to wealth and/or income inequality

Answer 22

• differing levels of education
• wage differentials
• ownership of financial assets
• discrimination
• location/region
• age

Question 23

Give an example showing the relationship between wealth and income

Answer 23

• owning a stock (an asset = wealth); receive dividend payment (=income)
• owning property (an asset = wealth); receive rent (=income)

Question 24

Explain how wage differentials are a cause of wealth and/or income inequality

Answer 24

• individuals have different skills and knowledge
• different MRPs
• different supply and demand of labour
• different wage rates

Question 25

State why employees who are older may receive higher wages than those who are younger

Answer 25

• more skills and more experience (higher MRP)
• potential discrimination against younger people

Question 26

State why employees who are nearing retirement age may receive lower wages than those who are younger

Answer 26

• may be less productive, slower and less motivated
• reduced MRP

Question 27

List 4 types market failures which could lead to income or wealth inequality

Answer 27

• missing markets in education and training
• geographical factor immobility
• information failure
• under-consumption of merit goods

Question 28

Explain how missing markets in education and training could lead to wealth and/or income inequality

Answer 28

• different groups acquire different levels of skill
• leading to misallocation of education and training resources
• worsens inequality