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11 Macroeconomic Goals: Income Inequality (Methods (Transfer Payments…
11 Macroeconomic Goals:
Income Inequality
Methods
Transfer Payments
Advantages
Automatic stabilisers
Disadvantages
Reduces the incentive for workers to work
France
:
Two year ARE unemployment benefit system
€28.86 per day
Price Ceilings/Floors
Direct provision
of merit goods
Advantages
Good with positive externalities
Disadvantages
Reduces the incentive for workers to work
Progressive Taxes
Advantages
Automatic stabilisers
Alleviate the poverty cycle
Redistribution of income
works towards income equality
USA
:
Progressive tax with seven income brackets
10, 12, 22, 24, 32, 35, 37
Disadvantages
Reduces the incentive for workers to work
Poverty
Causes
Low income
Unemployment
Low levels of human capital
Low levels of capital or land ownership
Discrimination
Geography
Age
Limited social services
Poverty cycle
Consequences
Burdens on government to support healthcare
Low living standards
Higher levels of preventable diseases
Social problems
Inability to realise ones full potential as they cannot afford proper education
Equity VS Efficiency
Transfer
Payments
Disincentivize working and saving
Higher unemployment rate
Lower output
Transfer payments
funded by tax revenue
Opportunity cost
incurred
Less funds for government to invest in infrastructure or human capital
Less economic development
Government
Expenditure
Direct Provision
of merit goods
Correct positive consumption
externalities
No underallocation
of resources
Allocative efficiency
is achieved
Taxes
Direct
Lower after-tax income
Lower savings
Lower investments
Lower production
of new capital
Lower growth
Automatic Stabilisers
Reduce severity of inflations and
recessions
Less severe recession
Less wasted resources
due to unemployment
Greater allocative
efficiency
Less severe inflation
Smaller decrease
in investments
Income Equality
Indirect
Regressive
Worsens income inequality
IF intended to
correct negative externalities
Worsens income inequality
Improves economic efficiency