Key Idea: A market pays you for what you own and what you can do. Own a flat and you collect rent. Have a skill firms want and you earn a high wage. Own nothing anyone will pay for and the market pays you nothing. It is not trying to be fair; it is not trying to be anything. So even a perfectly efficient market can leave some people with almost nothing. This topic gives you two tools to measure the gap, the Lorenz curve and the Gini coefficient, and four tools a government can use to close it. Where you meet it:
Paper 1
- Essays.
- Any question on redistribution wants the equity versus efficiency trade-off: who gains, who pays, and a verdict.
Paper 2
- Data response.
- Explain [4] with a Lorenz curve: two countries compared, a change in shares, or new transfer payments. Every past part here has this shape.
- Define [2]: Lorenz curve, Gini coefficient, transfer payments, progressive tax.
Paper 3
- Policy paper, HL only.
- Each question ends by asking you to recommend a policy from the data. The tools on this page are the ones you choose between.
Equity, equality and efficiency: three different words
Equality means everyone gets the same. Equity means the outcome is fair, and what counts as fair is a matter of opinion. Efficiency means resources are used so that nobody can be made better off without someone else being made worse off. A market can be efficient and still be neither equal nor fair.
| Word | What it means | Kind of claim | Example |
|---|---|---|---|
| Equality | everyone has the same income or wealth | positive: count it and compare | two nurses on the same ward earn the same wage |
| Equity | the distribution is fair | normative: it depends on what you value | the nurse who works nights earns more than the one who does not: unequal, and most people call it fair |
| Efficiency | total surplus is as large as it can be; nobody can gain without someone losing | positive: measured by output and surplus | a market clearing at equilibrium with no deadweight loss, whoever ends up with the money |
Equal treatment can be unfair. Give every student in the class the same ten minutes of help when one of them is a year behind: that is equal, and it is not equitable. Fairness may need unequal shares. The trade-off: a market that is fully efficient can be very unequal, and taxing high earners to redistribute can weaken the reason to work an extra hour. Every essay on this topic sits on that trade-off.
The Lorenz curve: the picture of the gap
The Lorenz curve plots the cumulative share of income against the cumulative share of the population, poorest first. If the poorest 40% of households earn 12% of all income, the curve passes through (40, 12). The 45° line is what you would draw if everyone earned the same.
Drawing the Lorenz curve
- Axes — Across: cumulative % of population, poorest first. Up: cumulative % of income. Both run from 0 to 100.
- Line of equality — The 45° line from (0, 0) to (100, 100). On it the poorest 40% earn exactly 40%: everyone has the same.
- Plot the shares — Add the shares up from the bottom. Poorest 20% earn 5%: (20, 5). Poorest 40% earn 12%: (40, 12). Poorest 80% earn 55%: (80, 55). It ends at (100, 100).
- Draw the bow — Join the points: a curve that sags below the line. The deeper the sag, the more unequal the country. The area between line and curve is the inequality.
Axes → 45° line → points → bow
Pick one point and say it in words: the poorest half of the population earns one fifth of the income. That sentence is what the diagram shows, and it is how you explain a difference between two countries. Every Lorenz curve starts at (0, 0) and ends at (100, 100). Only the sag between them changes.
The Gini coefficient: the gap as one number
The Gini coefficient turns the area between the line of equality and the Lorenz curve into one number from 0 to 1. Gini = A ÷ (A + B), where A is the area between the line and the curve and B is the area under the curve. You do not calculate it in the exam, but you must be able to read it.
| Gini | The Lorenz curve | What it tells you | Example |
|---|---|---|---|
| 0 | lies on the 45° line | perfect equality: everyone earns the same | no real country |
| about 0.25 to 0.30 | sits close to the line | a fairly equal distribution | Scandinavian countries |
| about 0.40 | a clear bow | a more unequal distribution | United States |
| 0.50 and above | bows far from the line | a very unequal distribution | Brazil ≈ 0.53, South Africa ≈ 0.63 |
| 1 | runs along the bottom axis, then straight up | perfect inequality: one person earns everything | no real country |
Curve moves towards the 45° line → Gini falls → more equal. Curve moves away → Gini rises → more unequal. Sometimes it is written on a 0 to 100 scale: 0.35 and 35 are the same reading. That link is the whole of every Paper 2 diagram question on this topic: an event or a policy moves the curve, and the Gini follows.
Why the market leaves a gap
The market pays people for what they own and what they can do. Nothing in it aims at a fair spread of income. So gaps open on their own, and some of them feed themselves.
| Cause | How it opens the gap | Who ends up where |
|---|---|---|
| Skills and education | a worker with more training produces more, so firms pay more | the software engineer earns several times the wage of the warehouse packer |
| Inherited wealth | some people start with property or shares that earn rent and dividends before they work a day | the heir collects the rent; the tenant pays it |
| Market power | a monopoly charges above cost and the profit goes to its owners | the owners of the only water company gain; every household paying the bill loses |
| Discrimination | the same work is paid differently by gender, race or background | two workers doing the same job, one of them paid less for it |
| Globalisation and technology | skilled workers sell to the whole world; routine jobs go abroad or to machines | the app developer gains; the assembly-line worker loses the job |
Important: Income is what you earn over a period: wages, rent, interest, dividends. Wealth is what you own at a moment: property, savings, shares, land. Wealth is spread far more unequally than income, and wealth earns income. The family that owns two flats collects rent, saves it, and buys a third. The gap feeds itself.
Closing the gap: four tools
A government cannot make the market fair. It can move income after the market has paid it out, or change what people are able to earn. Four tools, two speeds.
| Tool | What it is | What it does to the Lorenz curve | The catch |
|---|---|---|---|
| Progressive tax | the rate rises with income: a high earner pays a bigger share, not just a bigger amount | the top earners' share of income after tax falls, so the curve moves towards the line | high rates can weaken the incentive to work extra hours and push earners into avoidance |
| Transfer payments | money from the government with nothing produced in return: unemployment benefit, pensions, child allowance | the poorest households' income rises, so the lower part of the curve lifts towards the line | can create dependency and pull people out of the labour market; costs the budget |
| Minimum wage | a legal floor on the wage: the price floor from 2.7 | the lowest-paid earn more, at no cost to the government | set too far above equilibrium, it costs some of those workers their jobs |
| Public provision | free or subsidised education, healthcare and housing | changes what the poorest can earn later, so the curve moves over a generation | slow, expensive, and can miss the people it is aimed at |
Progressive tax and transfer payments move income now: the curve shifts this year. Education and health change earning capacity, so the curve shifts over a generation, and the change lasts because it treats the cause rather than the symptom. Progressive means the rate rises with income. A flat 20% tax also takes more money from a big income; that does not make it progressive.
Evaluating redistribution
Every redistribution question wants both sides and a verdict. The verdict is a value judgment: how much equality a society wants is a normative question, and no data can settle it.
For redistributing: Progressive taxes and transfers move the Lorenz curve **towards** the line of equality directly.. Public services give the poorest access to education and health, so equality of **opportunity** improves.. A minimum wage raises low pay with no cost to the government budget.. More equal societies tend to be more stable and healthier..
Against, or the costs: High tax rates can weaken the incentive to work and push earners into avoidance: the **equity versus efficiency** trade-off.. Transfer payments can create dependency and pull people out of the labour market.. A minimum wage above equilibrium costs some low-paid workers their jobs.. Programmes cost money to run and can miss the people they aim at: **government failure**..
Important: Inequality falls is not an evaluation. Say who gains (the family whose child allowance arrives), who pays (the high earner whose rate rises, the firm that hires one worker fewer), and how large the loss of efficiency is likely to be. Then a verdict: the right amount of redistribution depends on what a society values. Say so, and say why.
Worked examples
Every past question on this topic has been an Explain [4] with a Lorenz curve. Three of those here, in new scenarios, after the Define that opens most Paper 2 questions. Try each before opening the plan.
A text compares the Gini coefficients of two countries. Define the term Gini coefficient.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the diagram question this topic is always asked: two countries on one diagram.
Country X has a Gini coefficient of 0.27. Country Y has a Gini coefficient of 0.55. Using a Lorenz curve diagram, explain the difference in the distribution of income between the two countries.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now a shift away from the line.
Over ten years, the share of a country's income going to the richest 10% rose from 28% to 38%, while the share going to the poorest 50% fell. Using a Lorenz curve diagram, explain the change in the distribution of income.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And a shift towards it: the policy version.
A government introduces a monthly child allowance paid to every household with children, funded by a higher tax rate on the top income bracket. Using a Lorenz curve diagram, explain how the policy is likely to affect the distribution of income.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Quick self-check
Tap each card to check yourself.
Every worker in a firm gets the same €1,000 bonus. Equity or equality? Equality: the same for everyone. Whether it is equitable is a value judgment: the cleaner and the director did different work for the same €1,000.
What goes on each axis of a Lorenz curve? Across: cumulative % of population, poorest first. Up: cumulative % of income. The 45° line is perfect equality.
The Lorenz curve passes through (60, 30). Say it in words. The poorest 60% of the population earn 30% of the income. The point is below the line, so the distribution is unequal.
The Gini falls from 0.45 to 0.38. What happened to the curve? It moved towards the 45° line. The area between line and curve shrank, so income is spread more equally.
The rent a landlord collects each month: income or wealth? Income: a flow over a period. The flat itself is wealth, a stock owned at a moment. The rent is wealth earning income.
A flat 15% tax on all income. Is it progressive? No. Progressive means the rate rises with income. A flat rate takes more money from a high earner but the same share from everyone.
Which tools move the Lorenz curve this year, and which over a generation? Progressive tax and transfer payments move income now. Education and health change what people can earn, so they move the curve later, and for longer.
Name the trade-off in every redistribution essay. Equity versus efficiency. Redistribution makes the spread fairer; high tax rates and generous benefits can weaken the incentive to work or hire, so total output can fall.
Exam tips
- Draw the 45° line first and label it line of equality. Then the Lorenz curve below it. A curve above the line cannot exist.
- Label both axes in full: cumulative % of population across, cumulative % of income up. Population and income on their own lose the idea.
- Read one point aloud: the poorest 50% earn 20% of the income. That sentence is the explanation.
- Curve towards the line = Gini falls = more equal. Curve away = Gini rises = more unequal. Say all three together.
- Equity is normative, equality is positive. Say which is which before you compare them.
- Progressive means the rate rises with income, not the amount. Name the tool in words before you move the curve.
- Evaluate with the equity versus efficiency trade-off: who gains, who pays, and a verdict that admits it is a value judgment.