Syllabus points
- Distinguish equity from equality.
- Explain how income and wealth inequality are measured (Lorenz curve, Gini coefficient).
- Explain the causes and consequences of inequality and poverty.
- Evaluate policies to reduce inequality and poverty.
Equity vs equality
Equality means incomes are the same; equity means the distribution is *fair*. Most economists judge some inequality acceptable as a reward for effort and risk, while extreme inequality is seen as inequitable. The two ideas can conflict with efficiency — the "equity–efficiency trade-off".
Measuring inequality
- Lorenz curve: plots the cumulative share of income against the cumulative share of households. The further it bows below the 45° line of perfect equality, the greater the inequality.
- Gini coefficient: a single number from 0 (perfect equality) to 1 (perfect inequality), derived from the Lorenz curve. A rising Gini signals widening inequality.
Poverty
- Absolute poverty: income below the level needed for basic necessities.
- Relative poverty: income well below the average for the society, so people cannot participate normally.
Causes include unemployment, low wages, poor health and education, and discrimination; consequences include poor health, low social mobility and constrained growth.
Policies to reduce inequality and poverty
| Policy | How it works |
|---|---|
| Progressive taxation | Higher earners pay a larger share, narrowing after-tax gaps |
| Transfer payments | Benefits, pensions and unemployment support raise low incomes |
| State provision | Free/subsidised health, education and housing |
| Minimum wage | Raises the lowest wages |
Evaluation: redistribution can blunt incentives to work and invest (the equity–efficiency trade-off), and high taxes may prompt avoidance or capital flight. Investment in education and health tends to raise both equity *and* long-run efficiency.
Worked example
If a country's Gini coefficient rises from 0.34 to 0.41 over a decade, inequality has clearly widened — its Lorenz curve has bowed further from the line of equality. A more progressive tax-and-transfer system would push the Gini back down, though possibly at some cost to work incentives.
Common exam mistakes
- Treating equity and equality as identical.
- Confusing absolute with relative poverty.
- Ignoring the equity–efficiency trade-off in evaluation.
Exam technique
Use the Lorenz curve/Gini to describe inequality precisely, then evaluate redistribution policies against their efficiency costs.
Quick revision
- Equity (fairness) ≠ equality (sameness).
- Lorenz curve + Gini (0–1) measure inequality.
- Absolute vs relative poverty.
- Policies: progressive tax, transfers, state provision — mind the equity–efficiency trade-off.