The market’s inability to achieve equity

FAIRNESS in the distribution of income or resources. It is a normative concept that depends on value judgements about what is "fair". Different people and societies have different views on what constitutes an equitable distribution.

A numerical measure of income inequality from 0 to 1. 0 = perfect equality (everyone earns the same). 1 = perfect inequality (one person earns everything). Calculated as: Area A ÷ (Area A + Area B), where A is between the 45° line and Lorenz curve, B is below the curve.

A graph plotting cumulative percentage of INCOME (y-axis) against cumulative percentage of POPULATION ranked from poorest to richest (x-axis). It shows how far a country's income distribution deviates from perfect equality.

PERFECT EQUALITY — if every person earned exactly the same income, the bottom 10% would have 10% of income, the bottom 50% would have 50%, etc. The line goes diagonally from (0,0) to (100,100). The actual Lorenz curve always bows below this line.

Equity means FAIRNESS (which people disagree on). Equality means SAME FOR EVERYONE (everyone receives identical income/resources). Perfect equality would mean everyone earns the same — most economists agree this is neither efficient nor realistic. The IB specifically asks you to distinguish between them.

Lower Gini = more equal: Scandinavian countries ≈ 0.25–0.30. Higher Gini = more unequal: South Africa ≈ 0.63, Brazil ≈ 0.53, USA ≈ 0.40. Most OECD countries fall between 0.25 and 0.40. Changes over time show whether inequality is rising or falling.

The further the curve bows BELOW the 45° line, the MORE unequal the income distribution. A curve close to the line = relatively equal distribution. A curve that bows far away = very unequal. If the curve passes through (50, 20), the bottom half earns only 20% of total income.

A perfectly efficient market may produce very unequal outcomes. Redistributing to improve equity (e.g. high progressive taxes) may reduce efficiency (e.g. lower work incentives, tax avoidance). This is a central tension in economics — more equity can mean less efficiency, and vice versa.

Gini = Area A ÷ (Area A + Area B). Area A is between the 45° line (perfect equality) and the Lorenz curve. Area B is below the Lorenz curve. When the Lorenz curve moves closer to the 45° line, Area A shrinks → Gini falls (more equality).

Allocating resources to maximise total surplus (consumer + producer). Achieved when no one can be made better off without making someone else worse off (Pareto efficiency). An efficient market maximises the size of the economic "pie" but says nothing about how it is shared.

1) Doesn't show WHERE inequality exists (top, middle, bottom). 2) Two countries with the same Gini can have very different distribution patterns. 3) Doesn't capture wealth inequality (only income). 4) Ignores non-monetary factors like public services.

Label axes: "Cumulative % of population" (x) and "Cumulative % of income" (y). Draw the 45° line first (perfect equality). Then draw a bowed curve below it. The area between the two lines represents inequality. You can add a second curve to show the effect of a policy.

The curve moves CLOSER to the 45° line (more equal). For example, progressive taxation and transfers compress the income distribution, so the after-tax Lorenz curve is closer to the line than the pre-tax version. This also means the Gini coefficient falls.

Because "fairness" depends on personal values and beliefs, not objective facts. Some believe equity means equal outcomes; others believe it means equal opportunities. Economics cannot determine the "right" level of equity — it is a political and philosophical question.

Show that progressive taxes + transfers reduce post-tax inequality → Gini falls → Lorenz curve shifts toward 45° line. Conversely, tax cuts for the wealthy → Gini rises → Lorenz curve bows further away. Always link the Gini change to the specific policy.

Markets reward productivity, skills, and capital ownership — but these are unequally distributed. Workers with more human capital earn higher wages. Inherited wealth generates income for some. Market power allows firms to extract supernormal profits. Discrimination also causes unequal pay.

A tax where the marginal rate INCREASES as income rises — higher earners pay a larger proportion of their income. Example: income tax brackets (first £12,570 tax-free, then 20%, 40%, 45% in the UK). Directly reduces post-tax income inequality.

1) Directly reduce income inequality (Lorenz curve shifts toward 45° line, Gini falls). 2) Improve access for the poor — equality of opportunity. 3) Minimum wages boost low-paid workers' income. 4) Reduced inequality improves health, social cohesion, and economic stability.

INCOME is a FLOW of money earned over a period — wages, salaries, rent, interest, dividends. WEALTH is a STOCK of assets owned at a point in time — property, savings, shares, land. Wealth inequality is typically even greater than income inequality.

1) High tax rates may reduce work incentives and encourage avoidance (equity–efficiency trade-off). 2) Transfer payments may create dependency. 3) Minimum wages may cause unemployment. 4) Administration is costly and may be poorly targeted (government failure).

Payments from the government to individuals for which no good or service is provided in return. Examples: unemployment benefits, state pensions, child allowances, housing benefits. They directly increase the income of the poorest households.

If benefits are too generous relative to wages, some individuals may choose not to work (the "poverty trap"). This reduces labour market participation and productivity. Counter-argument: most people prefer work to unemployment, and benefits can be designed with work incentives.

1) Progressive taxation — higher earners pay more. 2) Transfer payments — benefits for the poorest. 3) Minimum wages — legal wage floor for low-paid workers. 4) Public provision of services — free/subsidised education, healthcare, housing improve living standards regardless of income.

Wealth generates income (interest on savings, rent from property, dividends from shares). Those with more wealth earn more income → can save more → build more wealth → earn even more income. This creates a self-reinforcing cycle that widens inequality over time.

High-skilled workers benefit from globalisation and technology (higher demand, higher wages). Low-skilled workers face wage stagnation, outsourcing, and automation-driven job losses. This "skills premium" widens the income gap between high- and low-skilled workers.

Because it depends on a society's values. People who prioritise efficiency prefer less redistribution (lower taxes, more incentives). People who prioritise equity prefer more redistribution (higher taxes, bigger safety nets). Economics can show trade-offs but cannot dictate the "right" answer.

A legal wage floor raises pay for the lowest-paid workers, directly compressing the income distribution. However, if set too high above equilibrium, it can cause unemployment (surplus of labour) — hurting the very workers it aims to help (link to price floors, topic 2.7).

Use the Lorenz curve and Gini coefficient to illustrate effects. Discuss advantages (less inequality, better outcomes) and disadvantages (efficiency costs, dependency, unemployment). Balance with: "It depends on the size of the policy, the elasticity of labour supply, and the society's values."

Scandinavian countries: high progressive taxes + generous welfare states → Gini ≈ 0.25 (very equal). USA: lower tax rates + less redistribution → Gini ≈ 0.40 (more unequal). Both are wealthy — the difference is a political choice about how much to redistribute.

Markets allocate resources based on willingness AND ability to pay — not on need. Someone with no income has no "votes" in the market. Efficient outcomes may leave vulnerable groups unable to afford necessities. This justifies government intervention to redistribute.