preview

Economic Inequality

Powerful Essays
In modern industrial economics, it is still assumed that to gain economic efficiency from production, the economy would get so at the cost of an increase in income inequality. Greater equality is believed to reduce investment and work incentive, so system of rewards and penalties can encourage effort and channel it into socially productive activity. This reflects the living standards and material wealth of families in the economy, but this pursuit of efficiency necessarily compromises with inequalities and hence, the society faces a tradeoff between equality and efficiency. Not only can more equal distribution of income reduce incentives to work and invest, but the efforts to redistribute through tax system and other transfer programs can themselves be costly. Although, when growth is looked at over the long term, the trade-off between efficiency and equality may not be as prominent and equality may appear to be an important ingredient in promoting and sustaining growth. Because of this contrast, it is essential to explore the relationship and impact of the two criterions on the economy.
Economic efficiency is a capitalistic process that intends to uses the lowest amount of input to create the greatest amount of outputs. These inputs such as personal time, energy, money and raw materials are scarce resources that would need to be conserved while maintaining an acceptable production level. With such definition, it is commonly agreed that efficiency is a good criteria and can be used to evaluate economies and economic behavior. Conversely, equity refers to income gained from production and is often related with economic equality – the concept or idea of fairness (Okun, 1975), mostly in regard to taxat...

... middle of paper ...

...er programs have positive benefits in order to argue that efficiency is enhanced. These benefits must outweigh all of the costs associated with its required level of transfers. These policy examples suggest that income redistribution with behavioral incentives needs to be linked and explored for more reasonable opportunities. Such programs may take a greater degree of management skill and design attention than simple transfer programs, but they may also significantly reduce income losses from the more traditional transfer programs. This can then limit the leaky-bucket effect produced by these programs. It would also be useful to do more comparative evaluations of policies intended to generate investment returns, so that policymakers can more effectively determine what specific policy design attributes are most likely to produce the largest long-term income gains.
Get Access