Key Idea: Topic 2.12 explains why free markets produce unequal outcomes, how inequality is measured (Lorenz curve, Gini coefficient), and the tools and trade-offs of redistribution.
✅ Core definitions
- Equity
- Fairness in income distribution — a normative concept (subjective, based on values).
- Equality
- Everyone gets the same — different from equity. The IB requires you to distinguish them.
- Lorenz curve
- Graph of cumulative % income vs cumulative % population. The further from the 45° line → more inequality.
- Gini coefficient
- 0 = perfect equality, 1 = perfect inequality. Gini = Area A ÷ (Area A + Area B).
Equity ≠ equality. Equity is about fairness (normative). Equality is about sameness (descriptive). Always distinguish them in answers.
📊 Measuring inequality
- Lorenz curve — draw 45° line (perfect equality), then bowed curve below it
- More bowing = more inequality; curve closer to line = more equal
- Gini — Scandinavia ≈ 0.25 (equal), USA ≈ 0.40 (moderate), South Africa ≈ 0.63 (very unequal)
- Redistribution shifts the Lorenz curve toward the 45° line → Gini falls
🔧 Tools of redistribution
- Progressive taxation — higher earners pay a larger % of income
- Transfer payments — unemployment benefits, pensions, child allowances
- Minimum wages — legal wage floor for low-paid workers
- Public provision — free/subsidised education, healthcare, housing
⚖️ The equity–efficiency trade-off
- High taxes may reduce work incentives and encourage avoidance
- Generous transfers may create dependency (poverty trap)
- Minimum wages may cause unemployment if set too high
- The optimal level of redistribution is a normative question — depends on society's values
In evaluation: always state that the 'right' level of redistribution depends on values — economics shows trade-offs but cannot dictate the answer.