Micro 24 - Wealth and Income inequality

Question 1

Causes of income inequality?

Answer 1

• Wage differentials (price discrimination, monopsony vs perfectly comp.)
• Differences in skills, experience (age), education + –>
  differences in productivity
• Unemployment

Question 2

Causes of wealth inequality?

Answer 2

• Income inequality
• Age
• Inheritance
• The housing market (too expensive housing)

Question 3

Benefits of inequality?

Answer 3

1. The ability to earn a higher income = motivation = + MRP.
2. Some jobs are undesirable – + pay incentive needed.

3.Profit/ + incomes = reward for investment.

Question 4

Causes of poverty?

Answer 4

1. Wage differentials
2. Job insecurity and part-time work
3. Unemployment
4. Economic inactivity
5. Old age
6. Regressive taxes/ Social security

Question 5

Explain the supposed trickle down effect, and what really happens? (Market-based)

Answer 5

Cut in cooporation –> increase in investment –> increased jobs/ wages –> increased consumer demand.

                                    BUT

decrease in corporation tax –> decreased gov. tax rev. –> cut in gov. spending on public services + social security –> increased inequality.

Question 6

Interventionist strategies to reduce inequality/poverty, with eval?

Answer 6

1. Increase in welfare payments (budget deficit/ inter-generational debt/ poverty trap)
2. Increase the NLW (unemployment/ inflation)
3. Invest in education and health (time lag)
4. Provide free childcare {most impoverished group} (debt)
5. Increase income tax for high earners
6. Increase inheritance tax to specifically tackle wealth inequality. (unfair/social unrest)

Question 7

Negatives of income inequality?

Answer 7

• Social const (crime)
• Potential wastage (talented = poor)
• Consumption of demerit goods

Question 8

Eval on tax Cut/ Increase?

Answer 8

+ Laffer curve
+ Brain drain
+ Opposes hard work

• Rev loss