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By the end of this section, you will be able to:
  • Explain the arguments for and against government intervention in a market economy
  • Identify beneficial ways to reduce the economic inequality in a society
  • Show the tradeoff between incentives and income equality

No society should expect or desire complete equality of income at a given point in time, for a number of reasons. First, most workers receive relatively low earnings in their first few jobs, higher earnings as they reach middle age, and then lower earnings after retirement. Thus, a society with people of varying ages will have a certain amount of income inequality. Second, people’s preferences and desires differ. Some are willing to work long hours to have income for large houses, fast cars and computers, luxury vacations, and the ability to support children and grandchildren.

These factors all imply that a snapshot of inequality in a given year does not provide an accurate picture of how people’s incomes rise and fall over time. Even if some degree of economic inequality is expected at any point in time, how much inequality should there be? There is also the difference between income and wealth, as the following Clear It Up feature explains.

How do you measure wealth versus income inequality?

Income is a flow of money received, often measured on a monthly or an annual basis; wealth    is the sum of the value of all assets, including money in bank accounts, financial investments, a pension fund, and the value of a home. In calculating wealth all debts must be subtracted, such as debt owed on a home mortgage and on credit cards. A retired person, for example, may have relatively little income in a given year, other than a pension or Social Security. However, if that person has saved and invested over time, the person’s accumulated wealth can be quite substantial.

In the United States, the wealth distribution is more unequal than the income distribution, because differences in income can accumulate over time to make even larger differences in wealth. However, the degree of inequality in the wealth distribution can be measured with the same tools we use to measure the inequality in the income distribution, like quintile measurements. Data on wealth are collected once every three years in the Survey of Consumer Finance.

Even if they cannot answer the question of how much inequality is too much, economists can still play an important role in spelling out policy options and tradeoffs. If a society decides to reduce the level of economic inequality, it has three main sets of tools: redistribution from those with high incomes to those with low incomes; trying to assure that a ladder of opportunity is widely available; and a tax on inheritance.

Redistribution

Redistribution means taking income from those with higher incomes and providing income to those with lower incomes. Earlier in this chapter, we considered some of the key government policies that provide support for the poor: the welfare program TANF, the earned income tax credit, SNAP, and Medicaid. If a reduction in inequality is desired, these programs could receive additional funding.

Questions & Answers

what is choice
Hamis Reply
what is indifference curve
Misba Reply
It is an alternative combination of consumption of two goods which gives equal level of satisfaction.
Shujjat
good morning guys.. I am Lawrence from Nigeria.. trust am welcome here..
Lawrence Reply
Lovely morning bro... Welcome 💕
Kosiso
ur most welcome lawrence
Kun
Welcome back to another session,happy Friday morning
Dumbuya
good morning guys I'm Oumar Kromah from Côte d'ivoire am I welcome here
Oumar
lovely morning bro welcome
Malak
i dont understand on economics
Noor
i m from pakistan
Noor
mashallah
Tanveer
I am from Nepal
OP
i m Pakistan
Malak
Am Gabriel from Ghana
Kwame
hmmm
Noor
are you ecnomist?
Noor
Am Eben Paak from Ghana
Eben
Okay.. Nice meeting us
Kosiso
l am James Borbor from Liberia
jackie
I am a researcher
jackie
you all are ecnomost
Noor
ohh nice
Noor
re search on economy
Noor
what is demand
Milton Reply
yes
Malak
Link seems to not work
Jayden Reply
what is an opportunity cost?
Azotikemah Reply
next best alternative cost...
suresh
Meaning of Economics
Kamara Reply
It can be define as the practical science that studies human relationship between End's and scare means which have alternative uses in all aspect of human life
Kosiso
what's the meaning of pure and impure
Levinel
Pure is free from immoral behavior or quality,Impure not clean dirty,filthy containing something that is in pure
Dumbuya
what is economics
Malak Reply
Economics is a social science which deals with humans behavior
Dumbuya
Explain two reasons why trade union membership may decline in a country
Pop Reply
analyse the factors that influence the strength of a trade union.
Pop
discuss whether or not trade unions benefit workers
Pop
nice questions guys
Kun
what is demand
ALALE Reply
what's the difference between elastic and inelastic
ALALE
The desire to purchase goods and services at a particular price
Dumbuya
Elastic: demand is price sensitive. Inelastic: demand is not price sensitive.
Ernest
what is equilibrium of a consumer
Kennedy Reply
is when marginal utility is equal to zero or entering negative.
Richard
what is international trade
joshua Reply
is the exchange of goods and services between two or more countries.
Richard
what is choice
Hamis
choice is the selection made between the various economic goods and services.
jackie
What is ceteris peribus
Kelvin Reply
Simply put, All things being equal
Mary
make all things being equal
ALALE
Things been equalized.. According to the definition
Kosiso
put all things equal
Dumbuya
What is the important of Economic
Parnda Reply
what is demand
Coded Reply
Demand is the various quantities of goods and services that consumers are willing and able to buy at a particular time over a given period of time
Kennedy
what is the rationality assumption?
Sadeya

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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