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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

List and explain four factors of production
Vuyo Reply
capital labour entrepreneur natural resources
Thembi
What is supply
Ogodo Reply
when the supply decreases demand also decreases
Thembi
types of demand and the explanation
akin Reply
what is demand
akin Reply
other things remaining same if demend is increases supply is also decrease and if demend is decrease supply is also increases is called the demand
Mian
if the demand increase supply also increases
Thembi
you are wrong this is the law of demand and not the definition
Tarasum
Demand is the willingness of buy and ability to buy in a specific time period in specific place. Mian you are saying law of demand but not in proper way. you have to keep studying more. because its very basic things in Economics.
Hamza
Demand is the price of Quantity goods and services in which consumer's are willing and able to offer at a price in the market over a period of time
Umar
Demand is the quantity of goods and services that the consumer are willing and able to buy at a alternative prices over a given period of time. But mind you demand is quite different from need and want.
Tarasum
Demand can be defined as the graphical representation between price&demand
alkasim
sorry demand is nt a graphical representation between price and quantity demand but instead that is demand curve.
Ebrima
Demand is the willingness and ability of a consumer to buy a quantity of a good over a given period of time assuming all other things remain constant.
Vedaant
what is commercialization?
Doris Reply
How to talk loan for bank?
Alfred Reply
what is the meaning of gpa?
Ritisha Reply
Answer: GPA stands for Grade Point Average. It is a standard way of measuring academic achievement in the U.S. Basically, it goes as follows: Each course is given a certain number of "units" or "credits", depending on the content of the course.
Yusuf
what is small and Microbuisenes
tadesse Reply
What is fiscal policy
Dansofo
Who is the funder of Economic
Dansofo
founder , that is Adam Smith
Daniel
what is model
Daniel Reply
The wealth of Nations
Yusuf Reply
the wealth of nations, is it the first?
Umar
Yes very sure it was released in 1759
Yusuf
thank you Yusuf.
Umar
then when did he died?
Umar
17 July 1790 Born: 16 June 1723, Kirkcaldy, United Kingdom Place of death: Panmure House, Edinburgh, United Kingdom
Yusuf
1790
Yusuf
that's my today questions, thank you Yusuf it's bed time see u after.
Umar
what is fiscal policy
kemigisha Reply
what's mode?
Umar Reply
mode is the highest occurring frequency in a distribution
Bola
mode is the most commonly occurring item in a set of data.
Umar
Please, what is the difference between monopoly and monopsony?
Olaleye Reply
is there monopsony word?
Umar
I have no idea though
Umar
please, in which year Adam smith was born?
Umar
monopsony is when there's only one buyer while monopoly is when there's only one producer.
Bola
who have idea on Banter
Ibrahim
like trade by barter?
Bola
Monopoly is when there's excessively one seller and there is no entry in the market while monopsony is when there is one buyer
kemigisha
Adam smith was born in 1723
Bola
 (uncountable) Good humoured, playful, typically spontaneous conversation. verb (intransitive) To engage in banter or playful conversation. (intransitive) To play or do something amusing. (transitive) To tease mildly.
Umar
which book Adam smith published first? the first book of Adam smith pls.
Umar
wealth on nation, 1776
Daniel
what is market power and how can it affect an economy?
Gab Reply
market power:- where a firm is said to be a price setter.market power benefits the powerful at the expense of others.
Umar
Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare
Kartheek
find information about the national budget
Molahlegi
three branches of economics in which tourism is likely to figure
Makgotso Reply
What are those three branches?
IlRegno

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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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