Equity And Redistribution of Income And Wealth (Copy)
8.2.1 Difference Between Equity and Equality
- Equality:
- Everyone receives the same amount of income or wealth.
- Strict equal distribution regardless of effort, needs, or contribution.
- Example: Equal pay for all, regardless of job type.
- Equity:
- Fair distribution based on need, effort, or merit.
- Takes into account differences in circumstances.
- Example: Higher taxes on rich to fund welfare for poor.
8.2.2 Difference Between Equity and Efficiency
- Equity:
- Focuses on fairness in distribution of resources and welfare.
- May require intervention to reduce inequalities.
- Efficiency:
- Focuses on maximising output and the best use of resources.
- Market outcomes often efficient but may be unequal.
- Trade-off:
- Policies promoting equity (e.g., taxes, welfare) may reduce incentives, lowering efficiency.
- Policymakers balance equity vs efficiency to achieve social goals.
8.2.3 Distinction Between Absolute Poverty and Relative Poverty
- Absolute Poverty:
- Condition where individuals lack basic necessities like food, shelter, and clean water.
- Measured by an income threshold or poverty line needed for minimum living standards.
- Relative Poverty:
- Condition where individuals have significantly less income or resources compared to the average society.
- Reflects inequality and social exclusion rather than bare survival.
8.2.4 The Poverty Trap
- Situation where individuals remain poor because:
- Benefits reduce as income rises, creating a disincentive to work more.
- Taxes and loss of benefits make additional work less rewarding financially.
- Leads to dependency on welfare and lack of upward mobility.
8.2.5 Policies Towards Equity and Equality
- Negative Income Tax:
- Government provides payments to low-income earners instead of taxing them.
- Ensures minimum income level and reduces poverty trap.
- Universal Benefits:
- Payments or services given to all citizens regardless of income (e.g., universal healthcare).
- Simpler to administer, less stigma, but more expensive.
- Means-Tested Benefits:
- Payments given only to those below certain income/wealth thresholds (e.g., food stamps).
- Targets the poor but can discourage work and have administrative costs.
- Universal Basic Income (UBI):
- Fixed income provided to all citizens unconditionally.
- Simplifies welfare, guarantees minimum standard of living, may reduce poverty traps.
Diagrams
Diagram 1: Equity vs Equality
Income Distribution
↑
| Equity: Adjusted distribution considering need
| | ***
| | ** **
| | ** **
| |___________________________→ Population
|
| Equality: Equal income for all
| | ***************
| |___________________________→ Population
Diagram 2: Poverty Types
Income
↑
| Poverty Line (Absolute Poverty)
|--------------------------------
| /|
| / |
| / | (Relative Poverty)
| / |
|____________/____|_____________→ Population
Diagram 3: Poverty Trap Effect
Income
↑
| Benefit Reduction / Taxation Rate
|
|
| ___________ (Income after work effort)
| /
| _______/ (Low incentive zone)
|____________________________→ Work Effort
Diagram 4: Negative Income Tax Example
Income
↑
| 45 |--------- (Maximum income)
| 40 | /
| 35 | /
| 30 |-------------/------------ Income with Negative Tax
| 25 | /
| 20 | /
|____________________________→ Work Effort