1. Redistribution of income and wealth
SBC Economics
Redistribution of income and wealth
Learning outcome AA
Explain the problem of unequal distribution of income
Differentiate between absolute and relative poverty
Describe the difference between income and wealth
Evaluate the different policies to redistribute income
Explain the trickle down effect
Reading: Unit 69

2. Redistribution of income and wealth
The free market is likely to lead to a situation where income and wealth are not distributed evenly amongst the population
This inequitable distribution of income and wealth can be described as market failure

3. Why is the uneven distribution of income and wealth a problem?
Absolute poverty
Absolute poverty exists when an individual does not have the resources to be able to live i.e. food, water, clothing, shelter, basic health care etc.
In extreme cases some members of society may die from being in absolute poverty, this is clearly inequitable

4. Why is the uneven distribution of income and wealth a problem?
Relative poverty
Relative poverty exists when people are living far below average living standards existing in their country or area
If the gap between the rich and poor (those in relative poverty) is too great it creates social problems

5. Why is the uneven distribution of income and wealth a problem?
Lack of horizontal equity
When people at the same level in society are not treated equally
Example: women being paid less than men for doing the same job
Example: discrimination against people from different races
This lack of equity may create social problems

6. Why may the uneven distribution of income and wealth be a good thing?
Economic efficiency
The differences in income levels may motivate people to work harder or get a higher level of education
The competition creates a greater level of efficiency in the economy

7. Measuring the distribution of income in an economy
We can plot the % of income against the % of households in an economy
This gives us a picture of the level of equality that exists in terms of income distribution
The diagram is known as the Lorenz curve

8. Measuring the distribution of income in an economy
Imagine that everyone in society had the same level of income i.e.
Bottom 20%
Next 20%
Middle 20%
Top 20%
% of income 20

9. Lorenz curve

10. Measuring the distribution of income in an economy
If income is not distributed evenly then the Lorenz would not be a 45° line i.e.
Bottom 20%
Next 20%
Middle 20%
Top 20%
% of income 8 12 16 24 40

11. Lorenz curve

12. Measuring the distribution of income in an economy
The further the Lorenz curve is from the 45° line the greater the level of income inequality