Unit 8.2 - equity and redistribution of income and wealth

What is equity

Equity is fairness in how income/wealth (and taxes/benefits) are distributed.

What are the two aspects of equity

Horizontal equity = people in the same circumstances should face the same tax. Vertical equity = the tax/benefit burden should be fairly shared between rich and poor.

What is equality

Everyone is treated the same, regardless of starting position or needs.

What is the difference between equity and equality

Equality treats everyone identically; equity aims for fairness by recognising different needs and circumstances.

What are two causes of government failure when using policies to promote efficiency

1. When the policies don't work and make it more inefficient  2. When the policies do work but increase inequality while doing so

What is efficiency

Using scarce resources to produce maximum at lowest cost and to deliver the goods/services most wanted by consumers.

How can policies aimed at efficiency affect equity + example

• In markets where there are negative production and consumption externalities  - Efficiency policies can increase inequality if they are regressive (e.g., road pricing charges the same fee to low‑ and high‑income drivers).

What is income

A flow of earnings over time (e.g., wages, rent, interest, profit).

What is wealth

A stock of assets at a point in time (e.g., property, savings, shares).

What is redistribution of income and wealth

Government uses taxes and spending/benefits to transfer resources from higher‑ to lower‑income households.

What is poverty

When households cannot afford a reasonable standard of living, including essentials like food, housing, water, healthcare, education and sanitation.

What is extreme poverty (World Bank line)

Where a household lives on less than US$1.90 per day.

What has been the global trend in extreme poverty since 1990 and the main reason for it

It has fallen since 1990 and is projected to fall further by 2030  - Main reason for the fall is projected economic growth.

What is absolute poverty

When household income is below a country‑specific minimum required to meet basic needs of life such as food, water, housing etc.  - People in this state cannot benefit from growth/rising living standards and can be trapped across time/generations.

What is relative poverty

Where household income is 50% or less than the average income in that country  - Compares the income of a household with the average income for their country  - They have money but only sufficient to meet basic needs  - Change can come about as family members get jobs or better paid jobs  - Can benefit from economic growth

What is the main factor that determines if a household can move out of relative poverty

Economic growth

What helps households move out of relative poverty (4)

Jobs, better‑paid work, education, and economic growth.

Why must you state the poverty type in exam answers

Policies differ for absolute vs relative poverty, so you must specify which you are addressing.

What is the difference between absolute and relative poverty

Absolute poverty:  - Income is below a country‑specific minimum needed for basic needs (food, water, housing, healthcare, education);  - The threshold is fixed  - People may not benefit from growth, becoming trapped across generations. Relative poverty:  - Income is at ≈50% or less of the national average, defined relative to typical living standards;  - Households usually meet basic needs but fall short of the norm  - Their situation can improve with jobs, higher pay and economic growth.

What is the poverty trap

Where an individual or family are better off on means-tested benefits rather than working

Why does the poverty trap reduce incentives to work

High marginal deduction rates mean little gain from extra earnings.

What are marginal deduction rates

The share of extra income lost through higher taxes and reduced benefits.

Why is the poverty trap an economic problem

It reduces labour supply, raises welfare dependency, and misallocates resources.

What are means‑tested benefits

Benefits that are paid only to those whose incomes fall below a certain level

What are 2 problems with means-tested benefits

1. Such benefits are not always claimed by those for whom they are designed  2. They can create disincentives to work (poverty trap)

What is one advantage of means‑tested benefits

They target support to the poorest, delivering more poverty reduction per £ of government spending.

Where are means‑tested benefits most feasible

More common in high‑income countries with a robust tax base to draw upon.

What are universal benefits + 2 examples

Payments available to all in a category (Often age related - e.g., state pensions/child benefit), regardless of income or wealth.

What is one advantage of universal benefits

Simple and avoid poverty‑trap effects from withdrawal.

What is one disadvantage of universal benefits

Expensive—money also goes to households that do not need it.

Which two problems of means‑testing do universal benefits overcome

They avoid the poverty trap and non‑take‑up / stigma.

What is universal basic income (UBI)

A regular, unconditional cash payment to every individual, regardless of income or work status payed by the government

How does UBI affect the poverty trap

It removes it—payments are not withdrawn as income rises.

What are 3 advantages of UBI

Provides income security, simplifies welfare, and recognises unpaid roles (e.g., caring, managing families).

What are 2 disadvantages of UBI

Extremely expensive and may pay those who do not need it, limiting help to others.

What is a negative income tax

A system with a flat tax rate plus a fixed annual benefit; if tax due is less than the benefit, the government pays the difference (a “negative” tax).  - Money paid out by the government to those earning below an agreed annual fixed benefit limit

How does NIT reduce the poverty trap

Support is withdrawn gradually as income rises, maintaining work incentives.

What is one advantage of NIT

Reduces poverty while encouraging labour participation.

What are two disadvantages of NIT

Implementation is difficult and can be fiscally costly—few real‑world examples.

How does NIT work with numbers

With a flat tax (e.g., 25%) and a fixed annual benefit (e.g., $4,000): if tax due is less than $4,000 the government pays the difference; if it is more, the person pays that tax.

Why may policies that improve equity reduce efficiency

Higher taxes/benefits can weaken incentives to work, save and invest.

Why do governments justify redistribution

To reduce poverty, improve fairness and promote social stability.

What is the equity–efficiency trade‑off

Pursuing equity may lower efficiency; prioritising efficiency can raise inequality—policy design must balance both.

Why are equity policies often limited in practice

Implementation problems (administration, cost, and politics) mean fewer opportunities are taken than theory suggests.