Markets pay people for what they own and the skills they sell. They do not aim at fairness.
Why incomes differ
Unequal opportunity
Where you are born and your parents' income shape your chances.
Skills and education
More human capital earns higher wages.
Owning resources
Owners of land and shares earn rent, interest and profit.
Discrimination
Some groups are paid less or promoted less for the same work.
The points to remember
- Wealth is inherited, so inequality passes from parents to children.
- Technology and globalisation can push down wages in jobs that move abroad or are automated.
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Governments redistribute income with taxes. Who pays most?
Our example (made-up numbers)
| Type of tax | Earns €20,000 | Earns €100,000 | Effect |
|---|---|---|---|
| Progressive: higher rate on higher income | pays 10% | pays 31% | More equal |
| Proportional: one rate for all | pays 20% | pays 20% | No change |
| Regressive: a sales tax takes more of a small income | pays 8% | pays 3% | Less equal |
Direct v indirect: Income tax is usually progressive; taxes on spending, such as VAT, are usually regressive, because poorer families spend more of their income.
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Transfer payments go the other way: from the government to people with low incomes.
Animated graph
Watch the graph build step by step in study mode.
Other tools, and the catch
Direct provision
Free schools and health care help most those who earn least.
Minimum wage
Raises the lowest wages.
The trade-off
Very high taxes and benefits may weaken the incentive to work and invest.
Paper 2 asked this in November 2023, for 4 marks, about Costa Rica.
Using a Lorenz curve diagram, explain how introducing extensive transfer payments may have changed the distribution of income.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
What the diagram must show
- Axes: cumulative % of population across, cumulative % of income up.
- The line of perfect equality and two labelled Lorenz curves.
- The new curve closer to the line (an inward shift).
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct, labelled diagram and the explanation: transfers go to low-income families (1), so income becomes more equal (1) |
| 1–2 | A correct diagram or the explanation |
| Wrong axis labels | At most 3 |