Equity in the distribution of income (notes)

Equity in the distribution of income - Introduction

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Syllabus: Explain the difference between equity in the distribution of income and equality in the distribution of income.

Income

Income is the rewards to the owners factors of production:

Land receives               rent
Labour receives             wages and salaries
Capital receives          interest, yields and dividends
Entrepreneur receives     profit

Basically the distribution of income refers to the share of total income owners of the various factors of production receive. This could be between each category (eg looking at income recieved by owners of labour - wages - compared with owners of capital - interest or within a given category (eg income received by factory managers compared with income received by nurses).

Syllabus: Explain that due to unequal ownership of factors of production, the market system may not result in an equitable distribution of income.

Equity

Equity refers to fairness and looks at whether the distribution of income (ie the relative amounts people receive as income) can be seen as `fair´: Should Business Executives receive a greater income than Economics Teachers, for example? (RCB says no but he would rather the income received by Economics Teachers be increased to that of Executives than that of Executives lowered to Economics Teachers - this is indeed a double-edged sword!). Anyway, the market system or market (price) mechanism rewards owners of factors of production according to the relative supply and demand situation. You can use a S and D diagram showing inelastic supply of labour (or other FoP): Increases in demand will impact greatly on the reward (wages if labour - Rock Stars, sportspeople, Bank CEOs etc; city centre rents if land; high interest returns if capital, dotcom boom;)

Equality

Equality is concerned with making incomes closer to each other (narrowing differentials) and the assumption often made is that more equal is better than less equal: This is highly controversial though. Superficial analyses of communism say that the wish is to make all incomes equal. But neither in practice (Compare Poliburo members income - especially real income - compared with a factory worker) or in theory (From each according to his ability to each according to his need, Karl Marx does not suggest equality but it does imply equity)

In western economies incomes are mainly determined by markey forces but it is of course much more complex than that where there are no market forces - eg Public Sector workers and Civil Servants and relativities come into play.

Market Economies do lead to wide disparities between onwers of factors of production and there is always a great deal of argument about the rich getting richer and the poor getting poorer; or politicians awarding themselves high pay rises when other people are experiencing real wage cuts. You can make your own mind up about the relative merits of each argument - it can be fun though watching Fox News - as long as you do not get sucked into their simplistic world.

In all economies government policy will often be aimed at using taxes and benefits to make incomes at least a little more equal .

Macroeconomics

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Equity in the distribution of income - Introduction