Inequality, Policy and Government

Flashcards covering key concepts from the lecture notes on Inequality, Policy and Government.

Lorenz Curve

A graphical representation of inequality of some quantity such as wealth or income, invented in 1905 by Max Lorenz.

How the Lorenz Curve Works

Shows the entire population lined up along the horizontal axis from the poorest to the richest, showing the cumulative fraction of total income received.

Perfect Equality Line

When there is complete equality of income, the Lorenz curve is a straight line with a slope of one (or 45 degrees).

Gini Coefficient

A coefficient that tells you the degree of inequality; approximated by g ≈ A / (A + B) where A is the area between the perfect equality line and the Lorenz curve, and B is the area under the Lorenz curve.

Wealth

The value of the assets owned by a household (net of their debts).

Earnings/Income

Income from labor, including wages, salaries, and self-employment.

Disposable Income

The income that a family can spend after paying taxes and receiving cash transfers from the government.

Redistribution

Transferring market incomes from rich to poor through taxes and transfers.

Pre-distribution

Shaping patterns of market income for rich vs poor by affecting endowments and their value.

Impact of Government Policy on Inequality

Government can foster a more equal distribution of disposable income through tax and transfer policies.

Market Income in the Netherlands

The poorest 10% of the population earns virtually 0% of income, while the poorest 50% earns less than 20% of income.

Disposable Income in the Netherlands

The poorest 10% of the population have about 4% of total disposable income, while the poorest 50% receive more than 30% of total disposable income.

Operation Barga

West Bengal government introduced this law in 1978, changing property rights to allow sharecroppers to keep up to three-quarters (75%) of their crop.

Minimum Wages

Guarantees living standards for the low-paid, but can negatively affect workers if it reduces job availability.

90/10 Ratio

A measure of inequality defined as the average income of the richest 10% divided by the average income of the poorest 10%.

Accidents of Birth

Differences among people in things over which they have virtually no control, such as their race, sex, nation, or parents.

Intergenerational Inequality

The extent to which differences in parental generations are passed on to the next generation.

Intergenerational Elasticity

Measures how much richer the child of the well-off father will be than the child of the poorer father.

Government as an Actor in the Economy

Government is the only entity within a territory that can dictate what people must do/not do and can legitimately use force.

Twin Objectives of Government

Ensuring mutual gains are large, fully realized, and shared in a fair manner.