The equity goal   Income distribution   Measurement  Lorenz curve  Gini coefficient   Absolute v relative poverty   Henderson poverty line   Equity v  efficiency  Cost v benefits of inequality   Economicstutor..com.au

Copyright © All rights reserved. Site administered by CPAP and content provided by Romeo Salla    

Email: admin@economicstutor.com.au     romeosalla@economicstutor.com.au


 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

Next page


Costs and benefits of inequality


There are a number of benefits associated with having an inequitable distribution of income which are largely 'economic' in nature.  These benefits of inequality stem from the relationship between equity and efficiency described above and include the (related) points below.



 The costs of inequality are primarily 'social' in nature and include the following points:



The overwhelming economic cost of inequality is the cost to governments (or taxpayers) via the financial support provided to low income groups in addition to the government expenditure to fund services that are required to address the negative effects of inequality (such as crime and mental health issues).  The net benefits associated with increasing the degree of inequality can be depicted via the diagram below.


As the degree of inequality increases away from total equity (GC=0), the economy experiences net benefits (i.e. the benefits outweigh the costs).  However, once the economy reaches the point where inequality becomes 'too great,' (arguably 0.33), any further increases in inequality are 'bad' for the economy as the additional costs start to outweigh the benefits (i.e. the net benefits start to fall).  It is uncertain when the net benefits are maximised for an economy (i.e. what GC achieves the 'optimal' level of inequality) and it is largely a value judgement.


Test yourself Previous page