Lecture 6 - Inequality Flashcards Preview

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Inequality - definition

The existence of difference in incomes or in other measures of economic well-being


Poverty - definitions (3)

An inability to maintain an 'acceptable' standard of living
- Absolute p.: inability to subsist, constant real amount unaffected by increase in living standards
- Relative p.: exclusion from the normal activities of society, the poverty line may reflect social norms and expectations


Measuring inequality within countries (2)

1) Lorenz curve: cumulative percentage of pop against cumulative percentage of income
-> comparisons b/n countries can be made but are only unambiguous if they do not cross
2) Gini coefficient: 0 when complete equality (Lorenz curve = diagonal), 1 when one person earns everything
-> weights equally all deviations, whether at lower or upper end of the scale


Why is the household used as the unit of distributional analysis? (3)

- many state benefits (in UK) are assessed on the basis of the family's needs
- many resources shared within a hh (eg. durable goods)
- sales taxes can't be attributed only to the hh member doing the shopping


Issues with household as unit of analysis

- different sizes
- are households or individuals the object of policy? -> if individuals, we need to know how resources are shared intra-hh
-> some evidence that distribution within hh matters: child benefits paid to the mother


How to take hh size into account when assessing living standards?

Equivalence scales, assigning weights to household members and dividing hh income by the total weight


Current vs. lifetime income

Households' incomes fluctuate over time but if they can borrow and save, lifetime income is their budget constraint -> gov may be more concerned about helping the truly (lifetime) poor than the temporarily poor


Issues w/ lifetime income

- expected value, can't be measured objectively
- current consumption may be a good proxy if hhs can smooth, although durable goods make it lumpy
-> non-durable spending may be the best indicator of living standards
- what about hhs that can't borrow to smooth? -> we may still want to have some lifetime redistribution


5 stages of income (ONS)

1) Original income
+ Cash benefits
2) Gross income
- Direct taxes
3) Disposable income
- Indirect taxes
4) Post-tax income
+ Benefits in kind (health, education, etc.)
= Final income


ONS Stats on the effects of taxes and benefits

1) 15-1 ratio of richest to poorest fifth of hhs is reduced to 4-1 by taxes and benefits
2) 52% of households received more in benefits than they paid in taxes (2012/13)
3) cash benefits made up 56% of gross income of the poorest fifth, only 3% for richest fifth
4) share of gross income paid in taxes is similar in both groups (~35%)


Issue with the incidence of benefits

If they change demand and supply in some market, the benefits of a cash transfer may shift away from the initial recipient
eg. help to first-time home-buyers may push up house prices and thus end up in sellers' pockets


Valuing the benefits of public provision of private goods

ONS values on the basis of costs, but in median voter model, only he values it exactly at cost
-> O'Dea and Preston argue we should value them in terms of alternative cash transfer that would make a hh equally satisfied (but hard to implement)


Insurance-type spending benefits

Many cash benefits are insurance against risks (eg. unemployment)
-> part of the benefit is the peace of mind to people not receiving it currently
-> O'Dea and Preston: should be valued by equivalent risk premium people would be willing to pay
-> would mean the benefit is evenly spread across the population, if risks vary little


Life-cycle redistribution

More like enforced saving and borrowing than redistribution
-> credit-constrained people may value it more