Equity And Redistribution of Income And Wealth (Copy)
8.2 Equity and Redistribution of Income and Wealth
8.2.1 Difference Between Equity and Equality
- Equity: Fairness in the distribution of income and wealth; recognises that people have different needs and circumstances.
- Equality: Everyone has the same income/wealth regardless of differences.
Table – Equity vs Equality:
| Aspect | Equity (Fairness) | Equality (Sameness) |
|---|---|---|
| Focus | Meeting different needs | Giving identical amounts |
| Example | Higher benefits for disabled persons | Equal benefit for all regardless of need |
8.2.2 Difference Between Equity and Efficiency
- Equity: Concerned with fairness.
- Efficiency: Concerned with maximising total output/welfare from given resources.
- Trade-off: Policies to improve equity (e.g., redistribution) may reduce efficiency by weakening work incentives, but extreme inequality can also harm efficiency.
8.2.3 Absolute vs Relative Poverty
| Type | Definition | Example |
|---|---|---|
| Absolute Poverty | Lacking basic necessities for survival (food, shelter, clothing) – fixed poverty line. | Living on less than $2.15/day (World Bank definition). |
| Relative Poverty | Income significantly lower than average in society – poverty defined in relation to others’ living standards. | Earning below 60% of median national income. |
8.2.4 The Poverty Trap
- Situation where low-income individuals have no financial incentive to earn more because increased income results in loss of benefits and higher taxes.
- Causes:
- High effective marginal tax rates.
- Withdrawal of means-tested benefits.
- Result: People remain in poverty despite opportunities to increase earnings.
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8.2.5 Policies Towards Equity and Equality
Negative Income Tax
- Government tops up income if earnings fall below a threshold.
- Combines welfare support with work incentives.
Universal Benefits
- Paid to all regardless of income (e.g., child benefit).
- Simple, avoids stigma, but expensive and may benefit the rich unnecessarily.
Means-Tested Benefits
- Given only to those whose income/assets fall below a set level.
- Targeted and cost-effective, but may discourage work due to poverty trap.
Universal Basic Income (UBI)
- Regular payment to all citizens regardless of circumstances.
- Provides security, reduces poverty trap, but expensive and politically contentious.