Market Failure - Income and Wealth Inequality | tutor2u Economics
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Market Failure - Income and Wealth Inequality

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

In a market economy an individual's ability to consume goods & services depends upon his/her income or other resources such as savings

An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources and can also lead to alienation and encourage crime with negative consequences for the rest of society

The free-market system will not always respond to the needs and wants of people with insufficient economic votes to have any impact on market demand. What matters in a market based system is your effective demand for goods and services.

When we are discussing inequality and poverty, we make value judgements i.e. normative views about what is an acceptable scale of inequality and what is not

Absolute poverty

  • Absolute poverty measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services
  • What we choose to include in a basic acceptable standard of living is naturally open to discussion.

Relative poverty

  • Relative poverty measures the extent to which a household's financial resources falls below an average income level.
  • Although living standards and real incomes have grown because of higher employment and sustained growth, Britain has become a more unequal society over the last 30 years

Poorer families have a lower life expectancy

People from poorer backgrounds are unhealthier and die earlier than the rich, according a study measuring the link between health and wealth. Poorer people in their fifties were 10 times more likely to die earlier than those who are richer, according to a report from the Institute of Fiscal Studies (IFS). The poor often have to stop work early due to ill health, the group added and this increases the risk of these groups suffering income poverty during their retirement years.

Source: BBC news and Institute for Fiscal Studies

A key cause of inequality is the dispersion of wages in the labour market. This next graphic focuses on the UK

Policies to change the distribution of income in the UK economy

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